Copper Supply Outlook for the 1980 'S

1. INTRODUCTION According to the classical economic approach of the open market economy, copper supply should be regulated by market forces which are (a) demand and (b) prices. In fact, demand is of primordial importance because prices are a reflection of supply-demand balance: they go up in times of shortages of supply and down when over-supply situation exists. In the past few years, this basic mechanism of market economy has been under pressure from a number of non-market forces, such as social and monetary problems of sane important copper producing countries; structural changes in copper mining companies through mergers with oil companies; and other factors which greatly contributed to distortion of the basic supply-¬demand equation. As a result, we have faced in the last three years a situation of oversupply rarely seen in the past, with a catastrophic fall in copper prices, huge losses at mines and unprecedented indebtedness of copper producers. This has deep repercussions in the copper business and its future supply outlook. This is particularly so when taking into consideration that high indebtedness and high interest rates conspire against the very survival of some traditional producers. As we write this comment (July of 1985), close to one half of U.S. copper production capacity is closed down, sane of it for good, while the same precarious situation exists in Canada, Australia, Zambia, and some other primary producers who cannot face present low prices with equally low costs. The question is then what this situation means for the medium-¬term future, until the end of this decade, Particularly when taking into consideration the fact that some of the factors influencing it are of a long-term character. 2. SUPPLY-DEMAND SITUATION IN THE LAST FIVE YEARS Since the last boon year, in 1979, when world copper consumption reached a record of 9.8 million metric tons of refined copper, demand dropped to only 9.0 million tons in 1982, when the crisis bottomed out, and then steadily recovered to the level of 9.7 million tons in 1984. Meanwhile, copper production, which in 1979 was only 9.4 million tons, in spite of the fall in demand, grew to 9.7 million tons in 1981 and 1983 and only temporarily was cut to 9.4 million tons in 1982 and to 9.5 million tons in 1984. As a result of this imbalance, hugh copper stocks were accumulated with supply systematically out¬growing demand by over 2 million tons at one time. With the Western World refined copper demand running at an average of 115,000 tons per week, this oversupply was equivalent to between 15 and 18 weeks production, i.e. twice as large as normal. This was immediately reflected in very low copper prices. Another contributing factor to relatively low copper prices was the lack of speculator interest for this commodity. Between 1981 and 1984 the world experienced a very intensive period of wealth distribution, high interest rates and intensive restructuring off world economy and its industrial sector. Therefore, much of the available money was attracted to more lucrative and attractive investments rather than to the lack-luster performance of copper, and for that matter, of the metal sector in general. The much announced and discussed recovery of the U.S. economy since 1983, and particularly in 1984, with an overall growth of the GNP by 6.8% in 1984, happened to be more oriented to the service sector than the industrial sector and therefore this recovery was not adequately reflected in copper consumption nor to metals in general. This put serious doubts about the future demand for copper. Consequently copper prices failed to improve in spite of an apparent fall in stocks and a healthy increase in the demand for copper since 1982. At the time of this writing (July, 1985), although same analysts claim that the available stocks are running at about 8 weeks of supply, which are considered to be below normal, copper prices are still very low at between 65 and 67 cents per pound of copper. Part of the answer may be the normal seasonal slow-down period in the Northern Hemisphere due to summer vacations and