Stronger copper price a boost for Ok Tedi but further rises needed for rest of the sector

The copper price has increased by about a quarter in 2017, although it is still below its 2013 highs. Stephen Howes, Director of the Development Policy Centre at ANU, tells Business Advantage PNG that the  boost in the copper price is important for Papua New Guinea and state-owned Ok Tedi Mining in particular.

The copper price over five years.  Source: Macrotrends

Howes says it is difficult to predict how long the increased price will last, but believes it is good news for PNG’s economy.

He says with limited foreign exchange dampening investment in Papua New Guinea, any improvements to foreign exchange supply will be a much-needed boost for the economy.

For many years, copper exports from the Ok Tedi mine in Western Province have provided a major source of foreign exchange for the country.

Investment

Olivier Vadillo. Source: Wood Mackenzie

The picture is not as positive for others looking to develop copper mines in PNG—at Panguna in Bougainville, for instance. To encourage further investment in Papua New Guinea, the market would need to see higher prices and for a sustained period of time, according to Olivier Vadillo, Head of Metals Research Asia Pacific at Wood Mackenzie.

Vadillo expects that the copper price will remain broadly around present levels for the next two or three years.

It will be the early years of the next decade, before supply/demand fundamentals would justify a significant and sustained rise in the copper price beyond where we are now.

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However, Vadillo doubts the predicted increase in price will be significant enough to entice companies to venture into Papua New Guinea.

‘To encourage companies to move into a complex jurisdiction similar to Papua New Guinea, they require strong prices for an extended period of time to ensure they can generate acceptable returns from their projects.’

Stability

The Ok Tedi mine pit. Credit: OTML

Potential investors are not only looking for a higher price, Vadillo explains, but they also need stability in terms of regulation and government, reliable infrastructure in the country, and physical security for their team working on the ground.

‘The uptick in the copper price is encouraging, but it doesn’t completely outweigh the challenges and risks posed.

‘Companies seeking to invest in large projects, will often need to provide their own infrastructure.’

‘Compared to other jurisdictions, Papua New Guinea isn’t as stable, and mining companies are seeking security for their investments.’

While Vadillo doesn’t expect to see companies rushing to invest large amounts of money in Papua New Guinea at the moment, he agrees that Ok Tedi will benefit from the increased copper price, and that this will eventually flow on to the broader economy.

Infrastructure

Vadillo says in response to infrastructure challenges, companies seeking to invest in large projects, often need to provide their own infrastructure, such as roads and power, to ensure reliability and efficiency for the project.

‘Chinese companies are likely to take the risk.’

Limited infrastructure poses significant challenges to resources companies needing to transport large equipment and high volumes of product.

‘Government-backed, cashed-up Chinese companies, are the most likely candidates to invest in infrastructure projects and take the risk of making a big move in Papua New Guinea at the moment,’ Vadillo adds.

‘Chinese companies are likely to take the risk because they are more interested in securing a resource base than having a high revenue stream in the short term,’ he says.

While it’s not impossible for Papua New Guinea to be a leading copper producer, Vadillo says it would take the right combination of copper price and stability, security and infrastructure for companies to make a large investment.

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