September 1, 2015 / 2:48 PM / 2 years ago

Copper bears retreat, but probably only to marshal forces

* Copper revenues in Chile peso: link.reuters.com/xyk55w

* Escondida costs fall to $1.07/lb in 2015 from $1.16/lb in 2014

* New capacity coming on stream this year and next

* China's SRB likely to practice patience

By Pratima Desai

LONDON, Sept 1 (Reuters) - Copper bears appear to have taken cover, but they are unlikely to hide for long as falling output costs due to "currency wars" and weak Chinese demand growth provide ample ammunition for another attack over coming months.

Benchmark copper on the London Metal Exchange fell to a six-year low of $4,855 a tonne on Aug. 24, since which time prices of the metal used in power and construction have recovered to above $5,000 a tonne.

But the relief is likely to be brief.

"Why would I buy today if I think I'll be able to pick it up cheaper tomorrow. You need to see blood on the street before the market tries to balance itself and that won't happen while producers are still making money," said Christoph Eibl, chief executive at Tiberius Asset Management.

"Falling emerging-market currencies are a gift for producers in those regions, given that they cover the drop on LME prices, and there is a high likelihood they will fall further and copper prices will fall alongside them."

An end to the U.S. Federal Reserve's bond-buying programme last year and expectations of higher interest rates in the United States have seen the dollar strengthen significantly. The dollar index <.DXY > is up about 20 percent over the past year.

For copper traded in dollars, the problem is depreciating currencies of major producers such as Chile and Australia.

That means higher revenues in the Chilean peso, which has plummeted about 40 percent since the Federal Reserve started talking about paring its bond purchases in 2013, and the Australian dollar, which has lost about 30 percent. It also means lower labour costs as wages are paid in local currencies.

Chile's Escondida, the world's biggest copper mine, managed and operated by global miner BHP Billiton , has seen unit costs fall to $1.07/lb or $2,360 a tonne this year from $1.16/lb in 2014.

"Unit cash costs at our operated copper assets declined by 14 percent during FY15," Billiton's chief executive Andrew Mackenzie said at a briefing.

GFMS analysts estimate direct costs, which include mining, smelting and freight, at $3,569 a tonne in the second quarter of this year and total costs, which include depreciation, at $4,616.

"(Direct) cash costs are now 8 percent lower than the recent peak we assessed in the first quarter of last year," said Bruce Alway, a GFMS analyst.

The energy element, accounting for between 5 and 20 percent, is another factor behind lower copper production costs. Crude oil at around $50 a barrel has tumbled about 60 percent since June last year.

Excess metal due to slower economic and demand growth, particularly in China, which accounts for about half of global consumption estimated at 22 million tonnes this year, is a major factor pressuring copper prices.

"It's hard to predict what China is doing, as an industry we should not be increasing production in anticipation of China demand," Glencore's chief executive Ivan Glasenberg told Reuters.

New capacity coming on stream over the next couple of years will also expand supplies and keep the market in surplus. Estimates of mine supply growth this year and next vary, but mostly average around 3 percent.

Goldman Sachs sees China's copper demand growth slowing to 1 percent this year from 5.8 percent last year and 11.3 percent in 2013. The U.S. investment bank expects to see a surplus of 506,000 tonnes this year and 673,000 tonnes in 2016.

"It is highly likely that the four-year trend decline in copper prices is set to continue through at least 2018," Goldman said in a note.

"Regarding the prospects for stockpiling by China's State Reserves Bureau (SRB), it is our strong view that copper cost deflation is likely to encourage SRB patience, with the government only likely to step in and buy physical at or below $4,500." (Additional reporting by Clara Denina and Olivia Kumwenda-Mtambo; Editing by Veronica Brown and Dale Hudson)

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