Higher gradesLong term, grades being mined are still falling, but for Q1 2015, the average implied ore grade was up 0.65 percent, at 0.67 percent copper (Alway noted that he's looking at recovered grades, not head grades). To him, that indicates that some copper miners could be going after higher grades, although he couldn't say definitively. "As a producer, what do you do if the copper price is collapsing? You have to high grade — so this is selective mining," he said. Alway also suggested that higher average grades could be chalked up to sequencing. "Imagine a big open pit," he said. "You've probably got two or three different working faces at any one time. You might be able to preferentially mine a high-grade section of the open pit [due to lower metal prices] if you've got enough flexibility." Near the limit Beyond that, although a stronger US dollar has weighed on the copper price as of late, Alway noted that the situation has actually helped producers in non-US countries in terms of cash costs. "Some [producers] benefit from a weaker local currency because they're selling in dollars," he said. Still, there's only so much existing producers can do. "The copper price has been in decline for many years, and more recently it's been at quite low levels for quite a few quarters," said Alway, adding that he's been seeing copper companies talking about cost control and capex control for the past three or four years. "I think there's limits, and we must be pretty close to those limits in terms of just being able to lower prices consistently." Alway also pointed out another data point that surprised him: Chinese refined copper output was up 9 percent year-over-year for the quarter. "It shows you that there's a lot of concentrate out there," he said.
What does it mean for prices?Despite those pressures on producers, Alway said that Thomson Reuters is still forecasting 3-percent growth in mine supply this year. He explained that the 90th percentile being underwater isn't necessarily indicative of supply coming off the market. "The idea is that if the average copper price falls below the most expensive producer for a sustained period, they have to close, and therefore it rebalances the market and then the price will rise," he said, adding, "but as we know, producers don't like closing mines." To be sure, closing mines, even temporarily, can be a difficult decision for producers given considerations such as environmental liabilities and rebounding metals prices. And it would seem that plenty of producers have been doing a good job of hanging on thus far. Taking a look at production, copper companies managed to record a 3-percent production increase for the first quarter compared to the same period in 2014. Relative to Q4 of 2014, production dipped 6 percent, but Alway explained that he prefers to look at year-on-year comparisons due to seasonality. "If you focus on the change from the fourth quarter, it might be a bit misleading because [the] fourth quarter is often stronger, first quarter often weaker," he said. Still, Thomson Reuters is holding to its price predictions from earlier this year: an average of $5,975 for 2015 with a much higher incentive price of $7,073 for new mine production. Certainly, the latter number offers a more welcoming scenario, and base metals investors will continue to watch for further changes in the space. Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article. Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence. Related reading: Why is Thomson Reuters GFMS Predicting a $7,073 Incentive Copper Price?
Bruce Alway of Thomson Reuters GFMS Talks Copper PricesLower Copper Price Squeezing Margins for Higher-cost Producers from Copper Investing News