Aurelio Resource Corp (fka AULO)

[MUSHROOMKING]

300,000 TONNE SHORTAGE
Copper concentrate shortages developing as mine output falls
Delays in bringing new mines on stream and reduced production due to working lower grades is contributing to a shortage of copper concentrates which may take longer to meet demand than previously anticipated

Author: Anna Stablum
Posted: Thursday , 27 Mar 2008

LONDON (Reuters) -

Copper smelter margins have fallen as a result of excess processing capacity and a lack of mine output and they could fall further as ore supplies tighten.

Smelters are struggling around the world, with low smelting fees paid by the miners to turn ore into metal, and the shortage of raw material is expected to persist, industry sources say.

"The circumstances will not change in favour of smelters ... If it changes it would be rather for the worst than for the better," Javier Targhetta, president of Spain's Atlantic Copper, owned by Freeport McMoRan Copper & Gold, told Reuters this week.

Mine production has not increased sufficiently during the past few years and many new projects coming on stream show lower ore grades, which generally make mining more expensive.

"Costs are rising, adding to the risk of project delays so instead of a concentrate market in balance by 2010-2011, the market could be balanced first in 2011-2012," another European producer said.

Analyst Christine Meilton at metal consultancy CRU said the concentrate deficit came in at around 300,000 tonnes in 2007.

"Most (smelter) requirements are covered by long-term contracts so they will get the tonnes -- it will be expensive -- but they will get the material," Meilton said.

European, Japanese and Korean smelters are expected to be well covered in terms of tonnage and some traders said this indicated the situation was less severe than many had forecast.

"All the smelters are still running at full speed ... the market is not as short as people thought," a trader said.

But a scarcity of feed is likely to get worse in the second half of this year, forcing production cutbacks.

"A lot of smelter maintenance is programmed for the first half of the year so that will ease the market," Meilton said.

CRU forecasts a shortfall in mine supply of 340,000 tonnes in 2008 and after smelter cutbacks the concentrate market could face a deficit of 50,000 tonnes to 60,000 tonnes.

The smelter cutbacks are mainly seen in China, where capacity expansion plans will be delayed due to a lack of feed.

"A number have shut down in the last few years and there will be more," Targhetta said, adding some 200,000 tonnes of China capacity could disappear in the next few years. CRU's Meilton expected further smelter cutbacks in 2009 as mine supplies continued to fall short.

MINE OUTPUT FALLING

Output fell at Chile's state-owned firm Codelco, the biggest copper miner in the world, in 2007.

"This is the third successive year Codelco has reported decreased output and 2008 does not appear to be getting much better," a recent Fortis Bank report said.

Codelco expects a drop of around 6.3 percent in 2008 from 2007, but predicts a rebound in 2009 and 2010.

On Thursday, Newmont Mining Corp. said output from its Indonesian unit may fall in 2008 due to lower ore grades.

Such news intensifies the battle among smelters for feed.

"The spot sales that we have made show an enormous appetite for concentrates," Targhetta said, adding that the situation had worsened since a benchmark smelter deal was set for 2008.

The fees -- treatment and refinement charges (TC/RCs) -- for 2008 were set at $45 per tonne to smelt ore into copper anode and 4.5 cents a pound to refine that material into metal.

Traders say this is below the cash cost for many smelters.

"It is not a gold mine to own a copper smelter in the current conditions," the European copper producer said.

Despite the concentrates shortage and the negative impact on revenues of a falling dollar, sulphuric acid prices are helpful.

As a rule of thumb copper smelters produce around three tonnes of sulphuric acid for every tonne of copper, depending on the quality of the concentrates and the sulphuric acid capacity.

"The sulphuric acid price is around 80-100 euros in Europe -- it has roughly doubled since last year," said CRU's Meilton.

The boom in mines using acid in leaching to produce metal has fuelled prices and helped smelters' net income.

Some 40 percent of Atlantic Copper's sales of sulphuric acid are either on spot or short-term contracts and the income from acid sales accounted for nearly one quarter of total revenues.

"It is a wonderful relief," Targhetta said.