KGHM, Poland’s largest and Europe’s second-largest copper producer, is investing over $400 million to modernize production facilities and reduce the cost of production. Currently the state owned company has a cost of production approaching US $3,900 per metric ton, but after the plant expansion, costs should reduce to a little over US $3,300 per ton. In the process, capacity will increase from 500,000 metric tons to 700,000 tons. The move is illustrative of the position other producers must be finding themselves in. KGHM not only has to dig its ore from 1 km (half a mile) underground, but as with many other producers such as Chile’s Codelco, ore grades are gradually falling. Consequently, costs are rising and although copper prices at US $7,500 per ton are virtually back to August 2008 levels, KGHM is bearish about prospects in 2010 predicting similar levels of profitability in 2010 from 2009 when the average copper price was only $5,045 per ton. Part of that will be due to the rising cost of production and financing the investments, but a large part will be the producer is expecting prices to come off from their current highs.
Rising copper prices are not all goods news for producers. In Chile, higher prices this year have pushed up production costs by encouraging workers to push for a larger slice of the profits. Chile’s ever-combative unions brought workers to strikes at the turn of the year which were only bought off with bonuses worth around $24,000, nearly $6,000 in soft loans and salary increases of 4 percent, according to a Reuters article.
The high copper price is also prompting governments to cash in on the current enthusiasm for the metal. The Polish government is looking to sell 10 percent in KGHM and the Indian government is rumored to be looking to offload a 20 percent stake in Hindustan Copper, estimated to be worth about $1.15 billion based on the stock’s current price. In both cases, governments are foregoing future profits from their investments in the interests of trying to balance their current fiscal deficits. Its unlikely history will show either government got out at the peak, prices are not expected to fall significantly, but as ever with governments, short term expediency wins over long term returns.