- The link between forecast mine production costs and forecast copper prices
- Mining pre-feasibility studies and the need to link assumptions on input costs and output prices
- In recent months, BME has been asked a number of times to provide long-term copper price forecasts for input into mine pre-feasibility studies. Each time we have responded by asking “These price forecasts are to be compatible with what specific assumptions on input costs and on the copper industry’s overall future cost structure?” This question has been met with silence each time, and it is clear that many companies are going into pre-feasibility studies with entirely independent and possibly quite incompatible assumptions on the two ends of the puzzle: input costs and output prices.
We would hope that mining companies have sorted that out by the time they come to bankable feasibility studies – and that banks have sorted it out too – though we are not convinced that this is always happening. To help bridge the gap, BME has recalibrated its copper price model to have the 5th decile of mining cash production costs net of by-product credits as one of the price drivers. The output is shown above in chart form.
Companies licensing the model will be able to feed in their assumptions on future copper mine production costs along with other price drivers and obtain price forecasts that should be fully compatible with their cost assumptions. This model will be available within the next few weeks. - Price to stock relationships and adjustments overtime to long-only investment in futures
- In last month’s Briefing, we tried to explain how we thought that index funds’ long-only holdings of copper futures affected LME stock to price relationships. Some readers were still not clear exactly what we meant and asked us for a picture of change through time. This we have done:
Index fund holdings seem to change the price level compatible with any given level of stock. If the starting point is a market in physical production-consumption balance, then if the volume of index fund holdings of futures rises sharply, the first result is a rise in prices (as was seen in late 2005—early 2006). Subsequently, however, copper consumption growth is reduced and production increased as a result of the price rise. Stocks then increase, weakening prices and something close to the original equilibrium price may be restored, but associated with a higher level of stocks. If the volume of index fund holdings later decreases, that reduces the price compatible with that starting stock level and prices fall - initially. That reduces supply and increases demand and eventually, something close to the old equilibrium price is restored, but at lower stock levels.
If a physical market surplus is accompanied by index fund dis-investment, the road back to an equilibrium price could be very bumpy. But that is what price risk management is for! - Latest Presentations
- Metal Bulletin's 21st Copper Conference - Bulgaria, June 2008 - PDF
- International Copper Study Group Meeting - Lisbon, April 2008 - PDF
- IQPC Commodities Conference - New York, April 2008 - PDF
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