April 6, 2016 / 2:27 PM / 2 years ago

REFILE-Global copper miners embrace cost cuts, reject production shutdowns

(Refiles to add Santiago dateline)

* Focus on operational efficiency, productivity

* CRU expects modest cuts below 100,000 tonnes

* Prices may need to fall below $4,400 for significant cuts

* Codelco aiming to cut cash costs to $1.26/lb this year

By Pratima Desai and Anthony Esposito

SANTIAGO, April 6 (Reuters) - Any lingering hopes of significant copper output cuts to offset slow demand growth from top consumer China and help balance the market have been laid to rest this week.

Instead, delegates and speakers at an annual gathering of the copper industry in Chile have come to the conclusion that a focus on cutting costs to survive low prices will dominate the agenda for some time.

Producers in essence are facing a “prisoner’s dilemma” wherein no one wants to be the first to seriously scale back production for fear other miners will not follow suit and reap the benefits, industry sources say.

“Price-led cutbacks have virtually stopped, suggesting a growing surplus of copper, unless demand growth accelerates or price-led cutbacks commence,” said John Mackenzie, executive chairman at Mantos Copper.

“Over the past six months we have reduced our cash costs by 50 cents a pound or nearly 20 percent, by focusing on cost control and operational efficiency.”

Nelson Pizarro, chief executive of Chile’s state miner Codelco, restated on Tuesday that the company was aiming to reduce costs further to $1.26 a pound this year, having already got them down to $1.39 a pound last year.

Even KGHM’s Sierra Gorda, which has been in ramp-up, said it had been running “an aggressive cost-cutting program,” said its general manager, Maciej Sciazko.

Costs have already fallen due to tumbling energy prices and currency depreciation. In Chile, currency weakness translates to higher revenues in the peso, which fell nearly 50 percent against the dollar in the three years to December 2015.

But with copper prices around $4,800 a tonne, a far cry from heady heights above $10,000 a tonne in February 2011, miners are looking for further savings by concentrating on operational efficiencies and improving productivity, rather than cutting loss-making output.

By the end of last year, some 650,000 tonnes of production had been taken out of the market due to price-related output cuts, analysts estimate. But that is a fraction of global consumption, forecast at 22 million tonnes this year, and there are not many more cuts to come, say industry experts.

“We’re anticipating a fairly modest reduction of less than 100,000 tonnes this year,” said Vanessa Davidson, director of copper research and strategy at CRU at the Cesco event in Chile.

What is more, the cuts will be offset by mine output from new operations, which have either started up over the past year or which have ramped up production to near full capacity.

Copper prices may have to drop much more to trigger significant cuts.

“I suspect that failing a pickup in Chinese demand, prices will need to fall to below $2 a pound ($4,400 a tonne) for meaningful cutbacks to balance the market,” Mackenzie said.

Benchmark copper on the London Metal Exchange fell to $4,318 a tonne in January, its lowest since May 2009, as the market started to worry about demand in China, which accounts for about half of global consumption.

Forecasts for Chinese demand growth this year range between zero percent and 3 percent.

Reporting by Pratima Desai and Anthony Esposito; Editing by Bill Trott

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