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Why Cost Cutting Might End Up Endangering Copper Markets

Copper Bars

Commodities downturns aren’t completely bad for producers. One upside — lulls in the market often bring operating and capital costs down, as competition for labor, supplies and services abates. 

And that appears to be exactly what happening today, in one of the world’s most important mining districts.

The copper fields of the world’s top-producing nation, Chile.

A report released Tuesday by the Chilean Copper Commission (Cochilco) revealed that copper production costs are falling in the country. With Chile’s largest miners seeing a notable reduction in C1 cash costs during the first quarter of 2016.

The Cochilco cost survey looked at the largest 19 copper mines across Chile — representing about 88% of the country’s total production. And found that cash costs during the first three months of 2016 fell to $1.285 per pound — down from near $1.48 per pound during the same period of 2015.

That represents a substantial 13% drop in costs in just 12 months. Meaning that producers today are saving an average of nearly $0.20 per pound on their copper output.

Cochilco said these big savings are coming as prices for key inputs like energy and services have declined. The commission also said that cost-saving and efficiency measures implemented by management in the face of lower copper prices have helped. Related: The End Of A Trend: Oil Prices And Economic Growth

All of that is obviously good news for producers. With these cost-saving measures helping to buoy profitability, even during the current market downturn.

But it’s an important warning sign for the global copper market in general. Showing that lower prices may not necessarily bring about the reduction in supply that many analysts have been looking for.

If big producers are indeed successful in reducing costs on a sustained basis, copper may instead settle into a “new normal” of lower pricing. Which could prevail for the foreseeable future.

And remember, the numbers above are somewhat delayed — representing just the January to March period. More-recent figures from individual Chilean miners have shown further cost reductions coming during Q2. With Anglo American saying last week that costs at its Chile mines fell 18% in Q2 — to $1.36/lb, from $1.66/lb in Q1.

Watch for more numbers on costs in Q2 and beyond. If this trend continues, it will represent a critical data point for the coming direction of global copper pricing.

Here’s to flattening out.

By Dave Forest

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