INTERNATIONAL COPPER MARKET: AND ADDED BURDEN FOR THIRD WORLD DEBTORS

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• Document Release Date: October 5, 2010
• Sequence Number: 1
• Publication Date: September 1, 1984
• Content Type: REPORT

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Directorate of
Intelligence
an Added Burden
for Third World Debtors
Confidential
International Copper Market:
Confidential
GI 84-10161
September 1984
405
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Intelligence 25X1
International Copper Market:
an Added Burden
for Third World Debtors
This paper was prepared by of the
Office of Global Issues. It was coordinated with the
Department of State.=
Comments and queries are welcome and may be
directed to the Chief, Commodity Markets Branch,
OGI
Confidential
GI 84-10161
September 1984
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an Added Burden
for Third World Debtors
International Copper Market:
Summary
Information available
as of 31 August 1984
was used in this report.
World recession has dealt a punishing blow to the copper market, leaving it
substantially oversupplied. Although conditions have improved somewhat of
late, prospects are not good for a robust demand recovery during the
remaining years of this decade as OECD economic growth remains sluggish.
Even if economic activity in the developed West picks up, it probably will not
be sufficient to turn the copper market around. Copper demand will con-
tinue to be constrained by a falling intensity factor, primarily as a result of
changing technologies and material substitution. On the supply side,
planned capacity increases-mainly by the LDCs-will just about offset the
modest growth in copper demand over the next several years, further
entrenching the oversupply situation. Moreover, government participation
in LDC copper industries is significant, making it easy to push a produce-at-
all-costs policy. For instance, in Zambia, Chile, and Zaire-where copper
accounts for 40 to 90 percent of export earnings-government control is
virtually complete.
Weak demand growth and abundant capacities throughout the 1980s will
seriously hamper LDC efforts to export their way out of the debt problem.
We believe that overproduction will keep copper prices and sales low for the
remainder of the decade, putting a crimp in LDC export earnings. Western
producers-particularly in the United States and Western Europe-will not
go unscathed either, as the buyer's market puts pressures on them to protect
their domestic copper industries.
Copper producers in the developed West are already under increasing
pressures from Third World suppliers. Most industrial countries are high-
cost producers that are finding it increasingly difficult to compete with the
LDCs under sluggish market conditions. A number of Third World suppli-
ers-in particular Mexico and the Philippines-are complicating the prob-
lem for producers in the United States, Western Europe, and Japan by
vertically integrating their industries into the smelting and refining stages.
While this strategy_ mitigates the poor copper export prospects for the LDCs
by capturing the value added in these processes, it will further increase
competition for developed country producers.
The copper issue also highlights the important linkage between trade and
the international debt problem. The current debt strategy supported by the
United States and other Western governments calls for the restoration of
LDC creditworthiness through export-based growth and LDC economic
adjustment policies. For their part, debt-troubled LDCs have undertaken
unpopular austerity measures to bring down payments deficits and reduce
Confidential
GI 84-10161
September 1984
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Confidential
new financing requirements. However, they are increasingly frustrated by
events beyond their control-such as rising interest rates and trade bar-
riers-that sap a growing share of foreign exchange earnings for debt
repayments. For some debtors, the sluggish response of commodity prices to
Western economic recovery together with rising protectionism is making the
trade-oriented solution to the debt crisis unworkable. According to Chilean
Government officials, a foreign exchange shortfall created by import restric-
tions on copper could make it impossible for Chile to continue full interest
payments on its foreign debt next year.
In our judgment, trade issues such as those surrounding copper could easily
become a rallying point for collective debtors' action protesting Western
trade barriers and advocating the need for a new debt strategy incorporating
greater support from Western governments. While Chile, Peru, Zambia,
and Zaire-heavily dependent on copper for foreign exchange earnings-
have the most at stake, other large debtors such as the Philippines,
Indonesia, and Morocco also have an interest in maintaining and increasing
their copper market sales. Current production expansion will soon make
Mexico a net copper exporter. Trade barriers could reduce the incentive of
debtor countries to continue implementing austerity measures and could
push debtors to press collectively for better repayment terms, including
limiting debt service to a smaller share of overall export earnings.
Restrictive trade practices also pose a dilemma for the IMF in its monitoring
of Fund-supported programs. Shortfalls in export earnings probably would
cause noncompliance with several of the programs' economic criteria, per-
haps triggering requests for waivers. On the one hand, the Fund must take
into account uniformity of treatment among members, many of whom could
also claim they are being penalized by restrictive trade practices. On the
other hand, IMF programs could fall short of what lenders view as mini-
mally acceptable, reducing their willingness to extend new credits in the
future. While resolution of the debt crisis does not hinge solely on copper,
copper represents the full range of issues that will need to be addressed in the
months ahead.
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25X1 Confidential
Contents
Demand Depressed
1
Impact on Stocks .
4
Looking Ahead
5
Changing Structure of Supply
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International Copper Market:
an Added Burden
for Third World Debtors
Demand Depressed
As the world economy passed through the 1980-82
recession, copper demand was hit in two ways-by the
general decline in economic activity and by the con-
tinued downward trend in intensity of use. According
to published industry statistics, non-Communist cop-
per demand fell by 1.1 million metric tons between
1979 and 1982, a 15-percent decline (figure 1).' Most
of the falloff in demand occurred in the OECD
countries, where consumption remains well below
Figure 1
Non-Communist Production and
Consumption of Refined Copper, 1970-83
previous levels (appendix B, table 4). Copper demand
in the LDCs has also slumped as a result of the
international recession, with the greatest impact oc-
curring in 1982. After experiencing a twofold con-
sumption increase and a doubling of its share of world
use during the period of 1971-80, LDC copper de-
mand fell by 100,000 tons in 1982 and was little
changed in 1983. Had the 1971-80 rate of growth in
copper usage been maintained, nearly 400,000 tons
more would have been demanded by the LDCs last
year.
Although much of the falloff in copper demand
resulted from the slowdown in business activity in the
developed countries, a large part of the reduction was
caused by a continuing decline in the copper-intensity
factor-copper usage per unit of economic activity.
The copper-intensity factor for the period of 1979-83
was 7 percent below that of the previous five-year
period and roughly one-fourth lower than in the early
1960s (figure 2). Had the intensity factor been main-
tained at the 1974-78 level, more than 900,000 addi-
tional tons of copper would have been used by OECD
countries in 1983. The main reason for the reduced
intensity pattern has been the availability of inexpen-
sive substitutes and the trend toward lighter weight in
the transportation sector.
Production Still Up
Despite the 1.1-million-ton drop in refined copper
usage in 1980-83, world mined copper production was
as high in 1983 as in 1979, a record year for copper
' In this paper "world" and "non-Communist" refer to the non-
Communist world)
7.0
Deficit
Surplus
consumption (appendix B, table 5). LDC copper pro-
ducers were a major cause for the market surplus. As
a group, they raised output by about 100,000 a year in
1980 and 1981 and more than 200,000 tons in 1982.
Even the small 1983 decline was caused partially by
technical problems at Zambian mines and by strikes
in Peru, rather than by a decision to reduce excess
production. With the exception of Zambia, Peru, and 25X1
the Philippines, all LDC copper producers in 1983
either maintained or increased production levels in
comparison with those of 1979. The largest gainer was
Chile, now the world's leading copper producer, where
output increased by 18 percent
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Figure 2
OECD Copper-Intensity Factors, 1960-83a
Thousand tons of refined copper
consumption per billion US S of real GNP
1.0 1960 65 70 75 80
In contrast to LDC output increases, producers in the
developed countries cut back significantly. According
to the Bureau of Mines, by late summer 1982 US
copper mines were operating at roughly 50 percent of
capacity. While capacity utilization rates improved to
65 percent by yearend 1983, US copper production
still was down one-third from 1981 levels. In Canada,
the world's third-largest copper producer, mine output
dropped by about 14 percent over the 1981-83 period.
Australia was the only leading producer of copper in
the developed West to expand output during this
period.F____-] 25X1
Production Costs and Government Policies
The divergence in behavior between LDC producers
and those in the developed countries in response to the
recession is largely explained by: (a) differences in
production costs; (b) the importance of copper to the
domestic economy; and (c) the degree of government
involvement in copper production. Costs of production
vary widely around the world because of differences
in ore grades and composition, processing techniques,
and productivity. Weighted averages based on incom-
plete Bureau of Mines data indicate that break-even
production costs vary from a high of 101 cents per
pound in Zambia, where low productivity offsets the
advantages of high-grade ores, to a low of 66 cents per
pound in Canada, where byproduct credits from
nickel production cut effective copper production costs
in half (appendix B, table 6).1 The wide disparity in
production costs largely explains why countries such
as Chile, Zaire, and Australia expanded copper out-
put during a period of sustained low prices while high-
cost US producers were forced to reduce production
drastically. At last year's average copper price of 72
cents per pound, few if any US copper mines operated
at a profit.
In addition to cost advantages at the mining level, the
LDCs' heavy dependence on copper-export earnings
and a high degree of government control over output
levels often cause the LDCs to overproduce. In Zam-
bia, Chile, and Zaire, copper accounts for 40 to 90
percent of export earnings, and government control
over the industry is virtually complete (table 1). These
factors cause these and other LDCs to attempt to
maintain earnings in the face of low world prices by
expanding output and export volumes even when such
actions conflict with market conditions
In Zambia, Chile, and Zaire, it is either explicit or
implicit government policy to produce and sell as
much copper as possible. Even in those countries
where average production costs are lower than world
prices, some marginal or unprofitable mines are kept
open. According to an industry publication, the Chil-
ean Government in 1982, for example, established a
price-support mechanism to aid small- and medium-
size copper mines to assure a stable supply of copper
ore to the smelter. This supply had been interrupted
when many of the unprofitable mines closed because
of the recession.
I Break-even production costs include mining and processing costs,
byproduct credits, and taxes, but not recovery of capital or profits.
Byproduct credits are able not only to reduce production costs but,
in some instances, to determine output levels. For instance, in
Canada much copper is mined as a byproduct or coproduct of nickel
operations. When the market for nickel is poor, less copper is
produced. In part, this coproduction phenomenon explains why
copper production in Canada has fallen in recent years.
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Table I
Government Control in the LDC Copper Industry
Ownership
and Control
In 1971, Chile nationalized most copper operations.
Under the new foreign investment law of July 1974,
foreigners were again permitted to invest in Chilean
mining. At present, two government-controlled com-
panies, the Corporacion Nacional de Cobre de Chile
(Codelco-Chile) and the Empresa Nacional de Min-
eria (Enami) account for roughly 85 and 5 percent of
Chile's copper output, respectively. The remainder is
made up of a few medium-sized and small privately
owned mines, a number of which are foreign owned.
Zambia nationalized mining in 1969, and now con-
trols 61 percent of Zambia Consolidated Copper
Mines (ZCCM), with the South African conglomer-
ate, Anglo-American Corporation, and other public
shareholders controlling 39 percent. All ZCCM pro-
duction is sold through the Metal Marketing Corpo-
ration of Zambia Ltd. Foreign companies have virtu-
ally no control over operations or sales.
All copper is produced by state-owned firms. Le
Generale des Carrieres et des Mines du Zaire (Geca-
mines) produces roughly 95 percent of the nation's
copper. Societe de Development Industriel et Miniere
du Zaire (SODIMIZA) produces the remainder. Last
year a Japanese consortium led by Nippon Mining
Co. sold its 80-percent interest in SODIMIZA to
Zaire. Gecamines has recently been given full re-
sponsibility for copper marketing.
In Peru there are various forms of business organiza-
tions involved in copper production: nationalized,
mixed ownership, and private. Southern Peru Copper
Corporation (SPCC)-a privately controlled compa-
ny majority owned by the US firm ASARCO-
produces roughly three-fourths of Peru's copper.
Much of the remainder is produced by the govern-
ment enterprises, Centromin and MineroPeru.
The bulk of Philippine copper is produced by private-
ly owned companies. Philippine investors control
these companies, but there are some foreign equity
holdings. The Philippine Associated Smelting and
Refining Association (PASAR) operates the sole
smelter. It is jointly owned by the government, three
Japanese companies, the World Bank affiliate, Inter-
national Finance Corporation, and about eight local
mining companies.
Privately held firms control copper production in
Papua New Guinea The Bougainville mine-the sole
producer of copper at present-is 53.6-percent owned
by Conzinc Riotinto of Australia Ltd. (a subsidiary of
Rio Tinto-Zinc Corporation of the United Kingdom),
with a 20-percent interest to the Papua New Guinea
Government and 23 percent to the public. The OK
Tedi deposit, which will be producing copper in the
not-too-distant future, is a joint venture of the Aus-
tralian firm, Broken Hill, Amoco, and three West
German companies.
Codelco operates as an autonomous business and
trades internationally. It receives no direct govern-
ment subsidies. Indeed, since it is one of the country's
principal taxpayers and must turn over all its profits
to the state, Codelco is one of the government's chief
sources of revenue. Codelco has followed a long-term
management plan for continued expansion of existing
operations. This sometimes conflicts with market
conditions.
ZCCM is proceeding with modernization and
expansion plans, but no major new projects are in the
pipeline. In the past, Zambia has produced as much
copper as possible. We expect this trend to continue.
However, because of declining ore grades, increasing
costs, and lack of investment funds, current rates of
production probably represent the upper limit. Ma-
jority foreign equity ownership in mining is
prohibited.
Although the mining facilities are state owned, Geca-
mines operates as an independent private company,
with responsibility for investments and operations.
The government taxes Gecamines' gross revenues,
not its profits. Zaire has adopted a policy of produc-
ing and selling as much copper as is possible no
matter what the price. Gecamines and the govern-
ment are both very interested in attracting foreign
investment.
The copper industry in Peru encourages foreign
investors. Although Peru will allow 100-percent for-
eign equity ownership, it prefers government major-
ity ownership. SPCC output is dictated by both
market conditions and political considerations.
The Philippines has traditionally had a hands-off
policy toward the copper industry. However, with the
completion of the PASAR smelter, the government
has made local miners commit a percentage of their
output to the smelter. Majority foreign equity owner-
ship is prohibited. Management decisions reflect the
market.
Bougainville is run as a profit oriented company. As
a result, market conditions play a large role in
determining output levels. Only net income is taxed.
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Table 1
Government Control in the LDC Copper Industry (continued)
Ownership
and Control
Three companies, Mexicana de Cobre, Cia, Minera
de Cananea, and Industrial Minera Mexico
(IMMSA) are responsible for more than 90 percent
of all Mexican production. The Cananea mine is 49-
percent owned by the US firm Anaconda, with the
remainder of the equity being held by government
enterprises and private interests.
The maximum foreign equity ownership permitted is
49 percent for private lands and 34 percent for
government reserve areas. The Mexican Government
is anxious to develop the country's mining potential.
Market conditions dictate production levels. Foreign
companies entering the mining business in Mexico
must form joint ventures with Mexican interests,
private or government, in which Mexicans not only
have a majority equity interest, but also effective
policy and management control.
Most Zambian copper is now being produced unprof-
itably, according to our calculations of break-even
costs. Last year, Zambia considered closing down
some mining capacity because of low world prices but
decided against it, apparently because of foreign
exchange and employment considerations. Not since
1958 has a major operating mine closed in Zambia.
Despite efforts to diversify the economy, copper still
provides 90 percent of Zambia's foreign exchange
earnings. Thus, the foreign exchange earnings of even
marginal mines are of great importance, and closing
them down would, in effect, close down sections of the
economy. In addition, approximately 60,000 work-
ers-one out of every seven Zambian wage earners-
are directly employed in copper production, and many
times this number are dependent on the industry. As a
result, layoffs in the copper sector could have serious
domestic political and economic ramifications.
Impact on Stocks
Overproduction by the LDCs caused a dramatic
buildup in commercial copper stocks during 1982-83.
Copper stocks grew by nearly two-fifths, to 1.5 million
tons, in 1982 alone. Although the market was in
better balance last year, total stocks increased by
another 36,000 tons, and were equivalent to about
three months world consumption by yearend.' Most
excess copper ended up on the metal exchanges, as
producers, merchants, and consumers reduced inven-
tories to a minimum. Copper held by the metal
exchanges nearly tripled, growing from 300,000 tons
in 1981 to 800,000 tons by the end of last year
(appendix B, table 7).
Coming Out of the Recession
Increased worldwide economic activity has signifi-
cantly improved copper demand during the first half
of this year. Through June, non-Communist copper
demand grew by about 6 percent in comparison with
the same period last year. In both the United States
and Japan, which together account for 45 percent of
non-Communist consumption, copper demand rose
more sharply, increasing by 10 percent. US consumer
expenditures in the housing and automotive sectors
were largely responsible for the stronger performance
here. In Japan, vigorous growth in industrial produc-
tion has stimulated copper demand. Over the past few
months, however, growth of copper usage in the
developed West has slowed. Looking ahead to 1985,
forecasters expect considerably slower industrial
growth, leading many industry observers to believe
that the copper recovery will be short lived.1
Copper price trends have roughly paralleled demand
developments. After climbing steadily to nearly 70
cents per pound earlier this year in response to rising
? Chase Econometrics, for example, expects industrial production in
the United States, Japan, and Western Europe to grow in 1985 by
only 0.9, 6.2, and 2.4 percent, respectively. By comparison, the
growth rate projections for these countries in 1984 are 11.8, 10.6,
and 4.0.
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25X1
consumption and subsequent stock liquidation-since
the beginning of 1984 stocks on the LME have fallen
by almost 60 percent and now total about 180,000
tons-copper prices have fallen back. At midyear,
prices were averaging only 65 cents per pound, about
the same as average fourth-quarter 1983 prices and
roughly 10 percent below the full-year average for
1983, and by the end of July had dropped below 60
cents per pound (figure 3).
he price retreat has been triggered by a
slowdown in the decline of LME stocks and reduced
investment demand. The rise in US real interest rates
also has made financial markets a more attractive
alternative than holding copper
Unless interest rates fall sharply, copper prices are
likely to rise only slowly over the next year because
the market remains substantially oversupplied. In
spite of significant drawdowns, total commercial
stocks remain high at 1.2 million tons, and ample
standby capacity will continue to hold down prices.
more than 900,000
tons of copper mining capacity-14 percent of non-
Communist 1983 consumption-has been temporarily
shut down since the recession. If prices begin to show
a sustained rise, idle capacity would be quickly reacti-
vated and operating mines would step up their produc-
Looking Ahead
The longer term outlook for the copper market is also
bearish. Even a sustained recovery probably will not
be sufficient to turn the copper market around. The
industry has yet to stem the decline in the intensity
factor, and the encroachment on its traditional mar-
kets by new materials and technology is likely to
worsen. In addition, shifts occurring on the supply
side in the LDCs could dramatically alter the struc-
ture of the industry, adversely affecting copper pro-
ducers in the developed countries
Weak Demand. We believe copper demand over the
longer term is likely to be significantly constrained by
a falling intensity factor in the developed countries,
primarily as a result of changing technologies and
material substitution. Advances in electronics and
design, for instance, have permitted the use of thinner
gauge wires in telephone equipment. In addition,
improvements in multiplexing-the process of sending
Figure 3
Copper Prices, 1972-84
140
130
multiple conversations through a single telephone
circuit-are reducing the need for additional cables.
The copper industry estimates that 15 to 20 percent of 25X1
potential wire consumption in telecommunications is
displaced every year by electronic innovation.
Material substitution will also contribute to falling
factor intensity. Automobile and aluminum industry
experts predict roughly a 50-percent increase in alu-
minum usage in automotive applications by 1990;
much of the aluminum will displace copper, particu-
larly in radiators. Copper also faces a major challenge
from fiber optics, which is expected to make substan-
tial inroads in communications uses. Conservation in
the use of copper has also been driven by the trends
toward lightness and size reductions in the transporta-
tion sector. For example, to counter the trend toward
greater use of aluminum radiators, copper fabricators
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Fiber Optics: the Implications for Copper
Optical fibers are technically superior to copper
coaxial cables in telecommunications applications,
which currently account for about 15 percent of
copper usage in the United States. Although copper
cables are cheaper than optical fiber cables by as
much as 1 dollar per meter, on a cost-per-message
basis the latter are considerably less costly, and, as
demand for optical fibers increases, costs will drop.
optical USfber
communications links are already operational along
the eastern seaboard. Moreover, late last year it was
announced that a consortium of the world's leading
telecommunications organizations will lay the first
transatlantic fiber optic submarine cable, putting it
into operation by 1988. Indeed, a US Government
study estimates that optical fibers will supplant
30,000 to 40,000 tons of copper per year in the United
States by 1987.
have developed thinner gauge strips and tubes. This
development will stave off a complete switch to
aluminum radiators, but it also will mean less copper
used per automobile produced.
While the LDC copper-intensity factor will continue
to rise somewhat, total LDC copper demand is expect-
ed to remain weak because of slow growth prospects,
worsening terms of trade, and import cutbacks. After
nearly tripling during the 1970s, LDC copper usage
since 1980 has declined by 10 percent overall. Over
the longer haul, copper demand by the LDCs also is
likely to depend in part on their development paths
and strategies. Even current gloomy demand projec-
tions may be too high if many LDCs take advantage
of innovations in technology that could enable them to
leapfrog stages of their economic development. Tradi-
tional uses for copper that accounted for a high
intensity-of-use factor during later stages of industri-
alization in the OECD countries may be bypassed
entirely by the LDCs. For example, LDCs are not
expected to use copper for guttering and roofing,
telephone switching, long-distance telecommunica-
tions, and mechanical control systems. They are ex-
pected instead to use aluminum and fiberglass, solid-
state devices, fiber optics, and computer controls in
2.3
2.9
3.6
4.3
1.8
2.5
3.1
3.8
1.3
2.0
2.6
3.3
08
a
f
2-8
0.4
.3
-0.1
0.5
1 1.2
1.9
As a result, we estimate an average rate of growth in
LDC copper usage of only 5 percent per year through
the end of the decade, less than half the rate of the
1970-80 period. This estimate assumes that the Asian 25X1
LDCs-particularly South Korea and Taiwan-will
continue to make robust gains, but that debt-troubled
countries, particularly in Latin America, will show
lower-than-average increases. If we are correct in our
estimates, LDC copper consumption will total about 1
million tons in 1990. As for the OECD, if real GNP
growth through 1990 is about 2.5 percent a year, as
many observers forecast, and if the OECD intensity 25X1
factor continues its current downward trend-a rate
of decline of about 1.5 percent a year-OECD copper
demand would total only about 6.4 million tons in
1990, barely a 1.5-percent average annual increase
over 1983.
these application
Figure 4
Growth in OECD Copper Demand
Under Alternative Scenarios
Unlikely scenario
Possible scenario
Most likely scenario
Assuming annual OECD real GNP growth rates of
2'%, 3'Y%~ 4% 5`%,
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Table 2
Selected LDC Copper Mining Projects
Project Capacity
Increments
The open-pit mine is currently producing about
60,000 tons of copper. Further expansion to 150,000
tons probably will come in the second half of this
decade.
Expansion of the mine is being funded by a $268
million loan from the Inter-American Development
Bank (IADB). When the expansion is complete in
1987, capacity will equal 650,000 tons.
The project is being financed by a US $100 million
credit line from the Export Development Corp.
(EDC), Canada's official export-import promotion
agency, and a US $115 million syndicated loan
managed by the Toronto Dominion and Nova Scotia
Banks. Tintaya, which is state owned, is contributing
$100 million to this project, which will be completed
by 1985.
The $600 million second stage of this project, which
initiates copper production, has been postponed for
two years. It is supposed to begin in 1986 at rates
building up to around 120,000 tons per year of
contained copper and about 8 tons per year of
contained gold. During the first few years of opera-
tion, however, production rates will be considerably
lower.
Putting the OECD and LDC projections together,
total world copper demand by 1990 will reach only
about 7.5 million tons, if our economic growth and
intensity-of-use projections are correct. That level
would be below the amount consumed in 1979, cop-
per's peak year of demand, and would represent an
average annual growth rate of only 1.9 percent over
present depressed levels. More optimistic growth and
intensity assumptions-especially for the OECD
countries-would of course lead to larger additions to
demand. For example, 3-percent OECD economic
growth and no further decline in OECD intensity
factors would mean a 2-million-ton increase in OECD
demand by 1990. Figure 4 shows estimates of net
additions to OECD copper demand under a different
growth and intensity-of-use scenarios.
Changing Structure of Supply. The increase in copper
capacities during the remainder of the decade-most
of it in Third World countries-will approximate the
modest recovery in world copper demand, further
entrenching the oversupply situation. About 700,000
tons of new mining capacity is planned by 1990, with
nearly two-thirds of the increase occurring in the
LDCs. Large projects in Argentina, Brazil, Chile,
Papua New Guinea, and Peru alone will account for
380,000 tons of the planned increase (table 2). With
only a 900,000-ton increase in demand projected,
surplus mining capacity will, therefore, continue to
pose a serious problem throughout the 1980s.
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aic piaiiuiiig w iiicicaNc tutu MHUILHig auu
refining capacities by roughly 900,000 tons and
650,000 tons, respectively, between now and 1990. If
these expansion plans are realized, the LDCs will
have a capability to process more than 80 percent of
their copper output through the smelting stage and
nearly 65 percent through the refining stage. This
compares with 1983 smelting and refining capabilities
of 72 and 57 percent, respectively. These develop-
ments will mean refining and smelting losses of
several hundred thousand tons a year for the OECD
economies, adding to pressures within the industry for
increased protection.
Much of the increase in refining and smelting capaci-
ty will occur in the industrializing LDCs:
? Brazil plans to expand capacity at the Caraiba
smelter/ refinery to 150,000 tons by 1986, up from
50,000 tons in 1983.
? The Philippines' PASAR smelter/refinery, which
began operations late last year, will reach its rated
capacity of 135,000 tons by 1986.
? Mexico's La Caridad smelter probably will come
onstream next year with 180,000 tons of capacity.
The capacity increases in Brazil and Mexico are of
particular interest, since both countries are significant
users of refined copper. With its expanded capacity,
Brazil, for example, will be able to satisfy about 75
percent of its refined copper needs and will be able to
reduce imports accordingly. Mexico will be able to
satisfy all of its copper requirements and have sub-
stantial tonnages available for export.
Implications
If our demand and supply projections materialize,
world copper refining capacity will continue to exceed
demand by roughly 2 million tons, about 20 percent,
throughout the remainder of this decade (figure 5).
These projections indicate that the world copper
market will remain substantially oversupplied. In
these circumstances, the LDCs that are already in
financial trouble and rely on copper for the bulk of
their foreign exchange earnings, Zaire and Zambia,
will be hard pressed to keep their domestic economic
Copper processing consists of four stages: (1) mining,
in which ore is extracted from the ground either by
underground operations or from open pits; (2) milling
or concentration, which includes crushing and grind-
ing the ore and removing the bulk of the waste
material to produce concentrates that contain 12
percent to more than 30 percent copper; (3) smelting,
which involves feeding the concentrates into furnaces
from which flows molten material that is about 98.5-
percent copper, called blister; and (4) refining, by
either an electrolytic process or a pyrometallurgical
process, with the former having somewhat higher
purity than `fire refined" copper. The last two stages
have been combined in some of the newer processes.
Most of the world's copper is electrolytically refined.
conditions from worsening. Even Chile-which is in a
better position than most other LDC copper producers
because of low production costs-will find it difficult
to service its debt or to increase domestic investment
in such a weak market. Given the poor outlook for
copper, we doubt that export growth will provide
much help to LDC copper producers in trying to work
out their debt problem. With few alternatives and
with constraints imposed by debt restructuring, the
LDCs may be stuck with a failed policy for years. (See
appendix A.
The bearish copper market will put additional pres-
sure on producers in the United States and Western
Europe who already are having difficulty competing
with low-cost LDC copper. Moreover, their problems
will be compounded by the LDC move to vertically
integrate copper operations. This development will
simultaneously tighten supplies of raw copper and
shrink OECD markets for their refined output. Many
industry experts feel that, in the absence of govern-
ment support, numerous copper producers in the
developed countries may have to close down opera-
tions, especially refining. With other industries such
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Figure 5
Copper: Supply and Demand, 1983-90
Actual 1983 Projected 1990
Capacity Capacity
LDC
Rest of world
? Optimistic projection.
Non-Communist consumption at
3.5-percent annual growth and no
decline in intensity factor.
? Expected projection.
Non-Communist consumption at
2.5-percent annual OECD growth
and 1.5-percent annual decline in
intensity factor.
Some evidence of tensions has already surfaced.
Chile, in particular, has been most vocal in addressing
the threat to its export markets. While Chile is 25X1
opposed to a debtors' club, according to published
statements by its Minister of Economy, it may press
for better debt-repayment terms. Suggestions such as
limiting debt service payments to 25 percent of overall
export earnings have been made in recent weeks.
Restrictive trade practices also pose a potential dilem-
ma for the IMF. Debt rescheduling and new financial
assistance are, in most cases, conditional on imple-
mentation of Fund-supported programs. Foreign ex-
change shortfalls probably would trigger noncompli-
ance with several of the programs' economic criteria,
and the Fund would have to decide how flexible to be
in waiving the criteria.F_~
as steel and textiles also facing the problem of
competing against cheaper foreign imports, more calls
for protection will be heard. This will be especially
true in Western Europe, where unemployment is
already high and budget flexibility is limited.
The expected weak world copper market and probable
reactions also could spill over into the debt-negotia-
tion area. For example, the current debt strategy
supported by the United States and other Western
governments calls for the restoration of LDC cred-
itworthiness through export-based growth and LDC
economic adjustment policies. For their part, debt-
troubled LDCs have undertaken unpopular austerity
measures to bring down payments deficits and reduce
new financing requirements. However, they are in-
creasingly frustrated by events beyond their control-
such as trade barriers-that prevent them from earn-
ing needed foreign exchange. In our judgment, trade
issues such as those surrounding copper could easily
become a rallying point for collective debtors' action
protesting Western trade barriers and advocating a
new debt strategy incorporating greater support from
Western governments
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Appendix A
Copper is the Third World's most important metal.
With sales between $5 billion and $6 billion annually,
it ranks third, after petroleum and coffee, among the
leading foreign exchange earners for the LDCs.
Growing financial difficulties have magnified copper's
importance in the earnings picture of many LDC
exporters. With dim prospects ahead for copper dur-
ing the remainder of the 1980s, LDCs will have to
look elsewhere for help in exporting their way out of
the debt problem.
Copper's contributions to the economies of individual
Third World exporters vary greatly. Copper's impact
for Chile, Zambia, Zaire, and Papua New Guinea-
Table 3
Third World Copper Exporters and The Debt Problem
which depend on copper for 40 to 90 percent of their
foreign exchange earnings-is readily apparent.
These economies suffer substantially during periods of
slow sales and weak prices. There is another group of
LDC copper exporters, however, in which copper's
importance is less visible but nonetheless important.
This second tier includes Peru, the Philippines, Indo-
nesia, and Malaysia-who rank among the world's
most indebted LDCs. For example, even in the Philip-
pines, which has a diverse export base, copper ac-
counts for 5 percent of export earnings and provides a
6-percent offset on Manila's annual debt service
payments
25X1
Copper Export Copper Earnings Lopper Export Debt Service, 1983 Copper Export Earn-
Earnings, 1983 Change Since 1980 Earnings as a (million US$) ings as a percent of
(million US$) (percent) percent of Total Debt Service
Export Earnings
1,836.0
-15
48
3,415.0
54
905.5
-33
89
468.9
193
771.8
-3
40
724.2
106
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Appendix B
Table 4
Refined Copper Consumption: Major Non-Communist Countries
Total
5,720
7,679
6,988
7,084
6,538
6,586
OECD
5,421
6,878
6,101
6,192
5,741
5,791
United States
1,854
2,165
1,868
2,030
1,661
1,786
Japan
821
1,330
1,158
1,254
1,243
1,216
United Kingdom
554
499
409
333
355
358
Italy
274
352
388
366
342
334
Other
1,220
1,738
1,530
1,461
1,409
1,383
LDC consumption as a percent 5 10 11 11 11
of total
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Table 5
Mined Copper Production: Major Non-Communist Countries
Other
266
259
242
270
268
272
LDC
2,316
3,244
3,330
3,431
3,646
3,592
Chile
692
1,063
1,068
1,081
1,240
1,257
Zambia
684
588
596
587
530
515
Zaire
387
400
460
505
503
503
Peru
212
397
367
328
356
322
Philippines
160
298
305
302
292
271
Mexico
61
107
175
231
239
193
Other
120
220
212
232
316
348
South Africa
144
203
212
211
207
211
LDC output as a percent of
total
46
54
56
54
60
60
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Table 6
Copper Ore Grades and Break-Even Costs:
Major Non-Communist Countries
Average Average Average Index
Ore Grades Break-Even Break-Even US=100
(percent) Production Costs Production Costs
(cents per pound) Less Taxes a
(cents per pound)
' Taxes vary from country to country, but in general they trend a
little higher in the LDCs, ranging from 9 percent of the break-even
production costs in the Philippines to 17 and 26 percent in Zambia
and Zaire, respectively. By contrast, taxes account for 6, 8, and 11
percent of break-even production costs in the United States,
Canada, and Australia, respectively.
Table 7
Commercial Stocks of Refined Metal
1980
1981
1982
1983
June
1984
Estimates
Total Commercial Stocks
1,029.4
1,086.9
1,498.9
1,535.2
1,185
Metal Exchange Stocks
285.5
296.9
502.2
806.9
555
New York Metal
Exchange
162.9
170.2
249.0
371.2
330
253.2
435.7
225
743.9
790.0
996.7
728.3
630
376.4
402.7
572.3
388.6
320
27.6
46.6
51.0
17.2
40
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