COMMENT: BHP Billiton to boost copper output

Australian mining powerhouse BHP Billiton announced plans this week to lower copper unit costs by boosting output by 1.7 million t/y. That’s’ a doubling of the 1.7 million tonnes the company produced in the year ending June 30, 2015. The target is US$1.08 per lb in the 2017 fiscal year, compared to US$1.21 in FY 2016. The company plans to put latent capacity at its operations back into production around the globe. Escondida is expected to maintain output at 1.2 million t/y. Costs at Olympic Dam should drop by 48% to US$1.00/lb following further job cuts. At Spence costs will drop by 10% to US$0.87/lb. Debottlenecking at Olympic Dam and Spence should support a rate of 200,000 t/d at those operations. BHPB president copper Daniel Malchuk made the announcement, saying that while near term oversupply is weighing on current prices, the company sees attractive long term fundamentals that support a positive outlook. “We see a number of factors creating the conditions for a significant supply deficit by the end of the decade,” he said. “Grade decline, falling investment across the sector, the lack of greenfield projects and challenges accessing sustainable power and water are all likely to constrain industry supply. Meanwhile we expect robust demand from China and non-OECD countries to add to the deficit.” Malchuk certainly has an optimistic attitude on the copper market. Boost production and lower costs so that the margin between production costs and sales revenues remains the same or increases. This strategy should work well for a large producer. However, it may push smaller, higher cost producers out of the market if the copper price does not rebound. Or should the price drop even lower as is the trend across 24 hours, 30 days, 60 days, a year and five years, even more marginal production will be taken offline. If the price doesn’t begin to strengthen soon – as in a year or 18 months – medium sized miners may also be forced to suspend operations. With fewer producers, the copper deficit that Malchuk predicts will become more likely. And with reduced supply, any uptick in demand will result in higher prices. Too bad those higher prices may not come soon enough to help the small producers.