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Big news in the copper market this week, with the government of Peru saying it has now passed Chile as the world’s top supplier of copper to China.
That follows an 81 percent increase in Peru’s China-bound exports during January to April of 2016.
But despite that change in the rankings, Chile still remains the world’s most critical spot when it comes to copper production. And this week we got one very important number on the state of the mining industry here.
That’s cash costs for copper production. With Chilean government agency Cochilco releasing its “Cash Cost Observations” report for the full-year 2015.
Cochilco gathered data from the 19 largest copper mining operations across Chile — representing about 90 percent of the country’s total output, and looked at the average direct, or C1, costs for producing a pound of copper.
The final average for 2015 came in at $1.532 per pound - up slightly from the $1.524 per pound cash cost that Chilean producers saw in 2014.
That’s a very important figure for a few reasons. First, it shows that producers have not yet begun to benefit from cost deflation in the mining sector — with overall production costs still continuing to rise during the past year.
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However, the pace of cost inflation was much slower than previous years. Suggesting that 2016 could finally see a fall in production costs for the industry.
This cash cost figure is also a critical benchmark for copper market observers to keep in mind. Especially given that copper prices have fallen notably over the last few weeks — down nearly 10 percent since late April, to a current level around $2.10 per pound.
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That’s had some analysts concerned about just how far copper could fall. And in that regard the $1.50 mark looks like a potential floor for prices — given that these numbers show most of the producers in the world’s top mining nation would be broke at that level.
All of which suggests we could see more weakness, but not that much more. It’s still not cheap to produce copper — and the world still needs metal. Watch for prices to track these supply and demand dynamics.
Here’s to a copper bottom,
By Dave Forest
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Dave is Managing Geologist of the Pierce Points Daily E-Letter.