Due to a huge increase in metal prices this year a large portion of previously closed production capacity (due to high cost of operation) should now be profitable again. The question is: will production come roaring back?
According to Barclays, globally around 3.8Mt of idled aluminum production, 1.2Mt of zinc concentrate, 500Kt of lead concentrate, 190Kt of nickel concentrate and 265Kt of copper concentrate production would be profitable at current prices. To put in context, those numbers are around 9%, 10%, 6%, 14% and 1.5% of 2008 total worldwide production, which are substantial. If all of that production came back online that it could really impact prices.
However, there is more to re-starting production than current price. Barclays estimates it could cost $25mm to restart each 100Ktpy of zinc mine as well as $25-50mm for capex. These are some huge sums of money especially in this tight credit environment (which could explain why miners have been so eager to sell new equity – a quick search on Bloomberg returned 225 pages worth of new stock offerings since Jan 1 2009). Given the financial constraint in this environment the producers will wait and see to make sure that higher prices are here to stay on a sustained basis – and that will introduce even further delay to restoration of production capacity.
The only place where production activity is picking up in a major way seems to be China – where the government is pumping money (their version of stimulus) to prop up basic materials and heavy industries.
Listening to various Q2 earnings calls for miners/refiners it does not seem to me like they're rushing back to crank up production just yet.
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Two things to consider here: current marginal producers ($2 for copper) and where the new production is coming from. Marginal producers for copper are either 1) in the copper belt in Africa (sov risk, political risk, ladida) 2) Huge capex outlay (Gawler Peninsula projects in Australia for copper, Indophil Resources' monster in Philippines. So, in the long run its gotta go up since the big finds with low costs in Chile and Peru just ain't there anymore. That being said, to ramp much above $2.20-$2.40 you really need a bona fide global increase in industrial output.
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