THE WORLD COPPER MARKET: RECENT TRENDS AND PROSPECTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700050004-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 20, 2016
• Document Release Date: March 10, 2006
• Sequence Number: 4
• Publication Date: January 1, 1973
• Content Type: IM

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Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The World Copper Market. Recent Trends and Prospects
L1, t , F ..-
LL1. .L' Fy J : i
d
Secret
ER IM 73-5
January 1973
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RET
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
January 1973
INTELLIGENCE MEMORANDUM
THE WORLD COPPER MARKET:
RECENT TRENDS AND ''ROSPECTS
1. The world copper markets was in much better balance during
1970-72 than in the late 1960s. Copper consumption (including small
Communist purchases) continued to move irregularly - near-stagnation in
1970 being followed by a 2% drop in 1971 and a 6% rebound in 1972.
Partly by design and partly by chance, copper production roughly paralleled
consumption, remaining a little above it each year. The surplus alleviated
the intense upward price pressures of preceding years and permitted
substantial inventory rebuilding. At close to US $0.50 per pound in the
United States and on the London Metal Exchange (LME) in December
1972, the price of copper was well below earlier peaks but far above the
depressed level of the early 1960s. Current prices allow most mines to make
reasonable profits but are providing few windfalls because production costs
have risen greatly during the past decade.
2. Strikes, natural disasters, and disrupted expansion plans adversely
affected copper mine output for most members of the Intergovernmental
Council of Copper Exporting Countries (CIPEC). As a result, CIPEC's share
of production from non-Communist countries dropped from 40.7% in 1969
to 38.6% in 1972. At the same time, a poor foreign investment climate
in some CIPEC countries encouraged copper mining investment in other,
more politically stable nations - mainly Canada, the United States, Australia
(including its protectorate, Bougainville), and the Philippines. CIPEC's
production share almost certainly will continue to decline during 1973-75
1. Excluding production and consumption in the Communist countries, but including their net
purchases from the non-Communist countries.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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because capacity is expected to increase only about 10%, compared with
an estimated 30% expansion elsewhere. Dependence of non-Communist
countries on CIPEC copper thus will probably continue to diminish, and
their ability to influence supplies and prices will be further eroded.
3. Although sharp short-run price fluctuations could occur, the world
copper market is likely to be rather soft through 1975, with average annual
prices on the LME perhaps not moving far from the present level. Copper
?demand may grow a little faster thin the long-term average of 4.5% annually
because of accelerated economic growth and shrinking substitution
opportunities. Non-Communist supplies generally should be sufficient to
accommodate the increased demand, although such circumstances as strikes,
mine accidents, and political turmoil may, of course, cause temporary
shortages.2 Net Communist purchases probably will continue to be too small
to have much effect on prices.
4. The world copper market has three fairly distinct components.
One is the United States, which possesses about 30% of mine capacity of
non-Communist countries and normally imports only 10% of its copper
requirements. The other non-Communist countries constitute a second
component, in which supplies move mainly to Western Europe and Japan
from Chile, Peru, Zaire, and Zambia - the members of CIPEC - and from
Canada. The CIPEC countries account for about 38% of mine capacity and
70% of exports in the non-Communist countries. Communist countries make
up a relatively self-sufficient third component, with output approximating
one-fourth of the non-Communist total. Traditionally, East-West copper
trade has been limited to a small net outflow from non-Communist sources.
The principal destination was the USSR in the early 1960s but has since
been the People's Republic of China (PRC).
2. In January 1973, Rhodesia protested black guerrilla activity within its borders by cutting off
Zambian shipments over the trans-Rhodesian rail line of goods other than copper. Zambia reacted
by also stopping copper shipments over this route, which normally amount to nearly half of its
total deliveries and about 10% of world exports. This action probably will effect copper supplies
and prices only temporarily - either because deliveries throudi kl:odcsi. are resumed or because
25X1 Zambia manages to ship a larger share of its copper through Tanzania to Dar es Salaam.
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5. Because US copper producers maintain more stable prices than
do other suppliers, the non-Communist countries have a two-tiered price
system. The US posted price sometimes is slow to reflect changing
supply-demand conditions. Most other transactions, although covered by
long-term contracts, are priced at the Ln4E cash quotation on the day of
delivery. Because the LME actually handles only a small part of the world
copper trade and is used for hedging, day-to-day price fluctuations are often
sharp. Both US and LME. prices have changed considerably over the long
term, mainly because the industry has had great difficulty adjusting supply
to demand. The long leadtime required for new mines, typically large
individual additions to capacity, and the tendency of producers to start
expansion programs belatedly and at about the same time have all
contributed to irregular growth of capacity and wide price swings.
Demand and Supply Trends, 1970-72
6. Non-Communist copper demand and supply generally were in
better balance during 1970-72 than in the late 1960s. Consumption of
refined copper continued to move erratically owing to the slowdown and
subsequent pickup in economic activity in most industrialized countries.
The US and LME prices nevertheless progressively converged and became
more stable. Much of the earlier pressure on prices vanished because copper
production ran ahead of demand each year, although not by a wide margin.
7. The 5% increase in refined copper output in 1970 brought
substantial price relief because consumption rose only slightly (see
Figure 1). Although consumption dropped in 1971, production declined
even more, mainly because of a 90-day strike in US mines and refineries.
To meet reviving demand in 1972, the industry drew heavily on scrap as
well as ore supplied and boosted production by a strapping 1210, to
6.4 million metric tons. The increase overcompensated for recovery in
demand, however, and LME inventories of refined copper reached an all-time
high of some 180,000 tons in November.
8. Reflecting these developments, the LME copper price dropped
from an average of $0.80 per pound in March 1970 - not far below the
1966 record monthly high of $0.86 -- to $0.46 in Januai y 1971 (see
Figure 2). Despite two brief subsequent periods of rising prices, the LM.E
price in December 1972 still averaged only $0.47. The US producer price,
which reached $0.60 per pound during mid-1970, generally remained above
the LME price during 1971-72, amounting to $0.51 in December 1972.
9. Although about two-thirds above the depressed level of the early
1960s, current copper prices are not particularly high relative to production
costs. These costs, which vary widely among mines, have increased by about
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Non-Communist Copper Production and Consumption*
Meted Content)
Thodsand
Metric Tans
esaor , .
Refined Production
Refined Consumption
(Includes net purchasus
by Coin
rnunist countriesl.'`i
} . Differences benUeen mt/ned copperprodt ction and mine production
e
repr
sent mainly production !mm scrap. Differences between relined
copper',pruduction end Consumption re/%ctinventn,, ehandoc,rn,
75% during the last decade and now average $0.35-$0.40 per pound. They
have been pushed up by the gradual but persistent decline in ore grades
and by increased exploration, capital, and labor costs. Although no major
mines have been forced to close, some operations in Chile, for example,
barely have been breaking even. Once the world's lowest cost producer,
Chile has become the world's highest cost producer in recent years because
of inept management, featherbedding, technical problems following
nationalization, and artificially ;ow exchange rates.
Developments in the CIPEC Countries
10. Nationalization of foreign-owned properties, strikes, political
uncertainties, and natural disasters combined to hold the CIPEC countries
to only a 5% rise in mine output during 1970-72. Their share of the
non-Communist total consequently slipped to an estimated 38.6%, compared
with 40.7% in 1969 and a 43% average during 1960-63 (see Figure 3).
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Figure 2
LONDON METAL
EXCHANGE PRICE
Monthly Average
-- -- Annual Average
UNITED STATES
PRODUCER PRICE
Monthly Average
11. Chilean output has remained close to 700,000 tons despite huge
US-company investments during 1967-70 aimed at boosting capacity to
1.05 million tons by 1972. Production stagnated in 1970 because of a
five-week strike at Chuquicamata, the largest mine. Although the US
companies had not yet completed their expansion programs and were still
grappling with technical problems when their properties were nationalized
in mid-I 971, capacity did increase to some 750,000 tons by the end of
year. Because of loss of key personnel, labor turmoil, and shortages of
materials and parts, however, output rose only marginally in 1971 and
probably declined slightly in 1972 (see Table 1).
12. Labor difficulties and continued wariness among foreign investors
have made Peru's recent production record almost as poor as Chile's. After
rising by 6.5% in 1970, copper output has stagnated at some 210,000 tons.
Peru's still-untapped copper deposits are the CIPEC countries' largest and
richest, as far as is known, but the Velasco government's development plans
5
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 Other
Canada
Chile
Zaiie
'Zambia
.19.9
211'
'13,O
1980;08. 1999 ..19770 :'~11 ;1972: ;
Annual Average Estimated
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Indexes 0f Productlon* From , Non Communist Copper nes Figure 3
Index (199043 annual averalle=10o),
17
Total Non-Communist Countries
-- CIPEC Countries
-- Canada
_, United States
- Other Countries
88 Y
1904 1965 1986; 1967 1988 1969; 1979 1971 1972
'Meta/ content
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Mine Production of Copper in the CIPEC Countries
1960-63
1972
Percentage
Increase
Average
1969
1970
1971
Estimated
1970-72
Total
1,615
1,971
1,969
1,979
2,073
5.2
Chile
567
688
686
708
700
1.7
Peru
182
199
212
213
212
6.5
Zaire
291
364
387
407
420
15.4
Zambia
575
720
684
651
741
2.9
have got practically nowhere since 1968. Only a small part of the foreign
capital needed for the expansion program has been forthcoming so far,
reflecting the regime's tough terms for private participation and the
companies' inability to obtain foreign financing in the wake of the
still-unsettled dispute over expropriation of the International Petroleum
Company properties.
13. Nationalization of virtually all copper mine capacity in Zaire in
1967 and Zambia in 1970 has not prevented output gains. Although some
expansion plans may have been delayed, the investment climate did not
suffer lasting damage; the private companies, which soon started operating
the mines under service contracts, have continued to expand capacity. Zaire
has increased production considerably since 1969, accounting for more than
one-half of the CIPEC countries' total gain. Zambian output was set back
by the September 1970 cave-in at the Mufulira mine - the world's second
largest underground copper mine - but it nevertheless reached a new high
last year.
Developments Outside the CIPEC Countries
14. Among the non-CIPEC countries, growth in copper mine output
during 1970-72 was most rapid in Australia, Canada, and the Philippines.
Much of the impetus for this expansion came from Japan, the world's second
largest copper consumer and the leading importer of unrefined copper.
Australian production increased an average of 9% annually, mainly as a
result of surging exports to Japan. Production gains came from vigorous
expansion programs by MIM Holdings at Mt. Isa, by Mt. Lyell Mining and
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Railway Co. in Tasmania, and by Peho-Wallsend in the Northern Territory.
Japan's needs also spurred copper development in Canada and the
Philippines, as well as at Bougainville in the Territory of Papua/New Guinea
(which is being administered by Australia under a United Nations' mandate).
15. US copper production has continued to be one of the most
volatile components of supply in the non-Communist countries. Output
increased sharply in late 1969 and in 1970, as a Phelps Dodge mine in
New Mexico, Duval's Sierrita mine in Arizona, and Anaconda's Twin Buttes
mine were brought on line in response to strong copper demand. Labor
problems, however, once again took their toll in 1971, when a 90-day strike
resulted in production losses in both ore and refined copper, estimated at
200,000 tons and 225,000 tons, respectively. In 1972, production merely
recovered to about the 1970 level.
Impact of Communist Transactions
16. Communist transactions did not have a major influence on the
world copper market during 1970-72. The PRC, which has not been able
to rely on countries belonging to the Council for Mutual Economic
Assistance for imports, has had to purchase about 100,000 tons annually
since 1968. While this amount represents about one-fourth of PRC
consumption, it is only 2% of non-Communist refinery production. In 1971,
Peking switched
to making direct purchases from Zambia, Chile, and several other countries.
This action temporarily raised LME prices because buyers
easoned that direct PRC
es would reduce supplies coming to the LME. The effect of PRC
purchases on copper prices in the non-Communist countries has been
mitigated by Soviet sales of up to 40,000 tons annually through the LME.
Growth of Mine Capacity Through 1975
17. Although expansion programs probably will fall well behind
schedule as usual, we expect mine capacity in the non-Communist countries
to rise by about 25% during 1972-75, to 7.0 million tons (see Table 2).
In terms of tonnage, the largest gains are likely to take place in the United
States, Canada, and Bougainville. The United 5States, Canada, and Australia
(including Bougainville) account for about 66% and all non-CIPEC countries
for 82% of the total additions anticipated.
18. The CIPEC countries' mining capacity is expected to increase only
about 10%, despite the abundance of copper resources and plans calling
in the aggregate for a 37% rise. As a result, the countries' share of total
capacity is projected to drop from 38% in 1971 to 34% in 1975. The gap
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Non-Communist Countries: Estimated Changes in Copper Mining Capacity
Annual Production Capacity
(T7uousand Metric Tons, Copper Content)
Percent of Total Capacity
Estimated
End of 1971
Probable Additions
During 1972-75
Expected
End of 1975
Estimated
End of 1971
Expected
End of 1975
Total
5,616
1,346
6,962
100.0
100.0
CIPEC countries
2,140
243
2,383
38.1
34.2
Chile
755
25
780
13.4
11.2
Peru
215
63
278
3.8
4.0
Zaire
405
110
515
7.2
7.4
Zambia
765
45
810
13.6
11.6
Other countries
3,476
1,103
4,579
61.9
65.8
Australia
163
76
239
29
3.4
Canada
740
275
1,015
13.2
14.6
Bougainville
Negl.
180
180
Ncgl.
2.6
United States
1,682
358
2,040
30.0
29.3
Other
891
214
1,105
15.9
15.9
between accomplishment and plan probably will be largest in Chile. Chile's
planned 42% expansion reflects the expectation that the large investments
made in the five largest mines during 1967-70 eventually will yield the
originally scheduled capacity of a little more than I million tons. However,
serious technical difficulties - some of which are expected to worsen -
plus continuing management and labor problems probably will prevent any
overall capacity increases in these mines. We expect that Chile's production
capacity will increase only by the 25,000 tons provided by the new Sagasca
mine, which is being financed by Continental Copper and Steel Co. with
some assistance from Japanese investors and a World Bank affiliate.
19. Zaire is likely to achieve about 90% of its planned capacity
increase, or a gain of l 10,000 tons - the largest among the CIPEC countries.
The state company, Gecomines, has obtained financing from the
Export-Import Bank and the European Investment Bank for expansion of
its facilities, and Zaire has also been successful in inducing private foreign
investors to look for and develop additional copper deposits. Peru has taken
steps to improve the foreign investment climate, and chances are good that
9
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the state mining company's Cerro Verde project will be brought on line
by the end of 1975. The government of Zambia also has scheduled sizable
capacity expansion through 1975. While no serious obstacles are in view,
full completion of the plan seems likely to be delayed until 1976 or 1977.
General Outlook for Copper Supply, Demand, and Prices
20. If mine capacity rises smoothly to the expected level for 1975
and if demand expands at the average long-term rate of 4.5%, there should
be no strong, persistent pressure in either direction on the present world
market price of around $0.50 per pound. As is usually the case in trying
to gauge future commodity prices, however, the influences of these
contingencies are uncertain. Projected additions to mine capacity amount
to an average annual gain of 5.510 compared with 4% during 1961-70. The
prospective general relationship between supply and demand and the present
high inventory level suggest that the average level of copper prices should
not be much higher during 1973-75 than in 1971-72. But what actually
happens to prices from month to month naturally will depend on short-term
supply and demand trends, which will not necessarily be congruent.
21. Copper demand has long been increasing irregularly and probably
will continue to do so, provoking price changes because of the slow supply
response. Under the influence of economic booms, recessions, changing
prices, shortages, and technological developments leading to substitution of
other materials, annual changes in copper consumption ranged all the way
from -7% to 11% during 1961-72. Acceleration of economic activity in some
leading copper-consuming countries raised the growth rate for copper
consumption above the long-term average in 1972 and probably will keep
it there in 1973. The growth of copper consumption may remain somewhat
above the 1961-70 trend in 1974-75 because the average copper price level
is expected to remain near the present moderate level and the most
profitable opportunities for substitution of other materials have been
exhausted.
22. The Communist countries' purchases are not likely to have a
significant impact on the world copper market through the mid- I970s. China
will try to hold down copper imports as much as possible and, therefore,
is unlikely to increase imports to more than 150,000 tons annually by 1976.
The Soviet Union recently has concluded direct purchase agreements with
CIPEC countries for about 100,000 tons per year, even though it plans
to increase its own production by 35%-40% during 1971-75. The interest
of the USSR in CIPEC copper is motivated by a desire to enhance its
political position rather than a need for the copper. Thus the USSR
undoubtedly will resell much of the imported copper in the world market
as it has done in the past with such commodities as Cuban sugar.
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23. Production capacity is likely to grow in spurts during 1973-75,
and actual output will continue to be vulnerable to such circumstances as
strikes, mine accidents, and political turmoil. Additions to mine capacity
probably will be appreciably larger in 1973 and 1975 than in 1974. Because
the expected spurt in 1973 coincides with expected strong demand, it should
help to keep prices near recent levels. A prolonged strike in the United
States could drastically tighten non-Communist copper supplies, as in 1967.
Political uncertainties in Chile and Zambia rnd (to a lesser extent) in Peru
pose continuing threats to sustained full use of capacity or scheduled
expansion programs.
24. The main copper consumers should become somewhat less
dependent on the CIPEC countries' resources during the next several years.
The CIPEC group's share of non-Communist output and exports is likely
to decline further, and the countries will be in a weaker position than in
the past to force prices up by withholding supplies. Effective concerted
action to raise copper revenues thus seems highly unlikely. Barring major
production troubles of its own, the United States will continue to have
the most secure supply and be in the best position to cope with any
curtailment of CIPEC shipments. Western Europe and Japan will remain
heavily dependent on the CIPEC countries, but expanding output in Canada,
Australia, and Bougainville - together with continuing availability of
significant supplies from South Africa and the Philippines - promise to
make them less vulnerable than formerly.
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