While producers have enjoyed the spoils of historically high copper prices, energy inflation and the need to develop higher cost projects to meet demand may well eat away at profits longer term, a Phelps Dodge Corp executive told this week's LME week conference.
"Cost management will be back in fashion again," Kalidas Madhavpeddi, senior vice president of business development at the world's no. 2 copper producer, told conference participants.
A dramatic 30 percent increase in copper prices this year has strengthened copper industry balance sheets. Since 2000, he said, Phelps Dodge's market capitalisation has tripled.
He also noted that the risk of inflation from soaring oil prices, critical to mining, may raise the industry cost curve.
Whether the increased cost structure becomes a long-term phenomenon largely depends on what happens with energy costs.
"A big part of it is in fuel prices. So you tell me where fuel prices go and we'll tell you what (copper) costs will do," the executive told Reuters in a interview.
If analysts projections are right and fuel prices stay where they are, then copper's cost curve will move up.
"If energy prices stay up, as analysts are predicting it will stay up for awhile, whether it's $50 or $40 or $60 (per barrel of crude oil), if that's the case, then the (copper) industry cost curve is going to stay up."
Higher copper prices have also brought new development projects up for re-evaluation. While some can be justified, most lie in the upper 50 percent of the cost curve.
"That's why managing costs is going to be very critical over the medium- to longer-term. Especially when you consider the copper grade in the industry is going down," he said.
Phelps Dodge will only "develop what makes economic sense. We're very committed to that," he said.
Looking globally at projects currently slated to open by 2010, producers will still fail to meet demand, he said.
To estimate demand, Madhavpeddi compared current brisk economic growth trends in China, India and Brazil, with strong economic booms in the US and Europe in the 1950s and '60s and with Japan in the 1960s and '70s, when annual copper consumption grew at around 5 percent.
"This is not a prediction, but let's assume that copper demand in the next decade grows at a similar rate through China, India and Brazil, in a rebuilding phase similar to what happened in the US, Europe, and Japan at the end of World War II, there is a deficit based on what we know," he said.
Moreover, he pointed out that copper industry reserves peaked in 1995 and have steadily declined since, while exploration expenditures have fluctuated sharply since then. He said he sees the majority of new reserves coming from Asia, Africa and the Far East presenting cultural and management challenges to Western-based producers. For its part, Phelps Dodge plans to start its 58 percent owned Tenke Fungurume mine in the Southern Congo in 2008 at 50,000 to 100,000 tonnes per year for copper and 4,000 to 8,000 tonnes of cobalt annually.
Substantial price increases have created another worry for copper producers - substitutions for cheaper materials. In cable, for example, Madhavpeddi said, some power cable makers have turned to the more steadily priced aluminium. And some tube users have been substituting plastics for copper.
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