Commodities | Apr 06 2006
Chinese demand is often given as the simple explanation for the ongoing strength in commodity prices, but there is always more to what moves a market than just the most obvious answers.
The copper market is an example, as while there is no doubt Chinese and global demand in general has been strong, another positive for prices has been declining production levels in Chile, the world’s largest copper producing nation.
Barclays Capital surveyed a group of copper producers in Chile to find answers for why production levels have been in decline in the past few years, the results giving support to the ongoing bullish outlook for commodities in general and copper in particular.
One factor weighing heavily against the producers lifting current levels of output is the increase in input costs, Baclays noting almost 90% of those responding pointed out costs have risen between 10-29% in the past 12 months, with energy costs recording the single biggest increase.
On top of this, the producers have simply been unable to find new deposits to replace reserves, restricting them to the mining of existing operations and so depleting overall grades, which again increases the cost of production.
Finally, almost half those questioned suggested there was no certainty their current expansion plans would proceed as forecast, so as Barclays notes future supply may in fact be lower than is currently estimated.
This led a number of producers to predict copper prices would be higher at the end of the year than is the case now, especially if as Barclays suggests there is greater long-term demand than producers are currently forecasting.