Copper’s breakdown The price of copper continues to plunge well below $3/lb. Kip Keen | The price of copper has lost its footing. Since 2010 and until late 2014 the spot price of copper held up quite well, trading consistently over $3/lb. In fact, ignore the rather brisk meltdown of almost everything during the financial crisis 2008-2009, and the spot price of copper has largely traded over $3/lb since early 2006. That mark – $3/lb – has long seemed or acted as a floor. Until the past few months. Copper’s slide began in serious in the second half of 2014. It was looking quite healthy until then up in ~$3.25/lb range. By October it dropped close to $3/lb, however. For a while it bumped along happily – off that $3/lb mark again – but in late November its fortune’s dimmed. It fell precipitously to around $2.90/lb and then declined more slowly to $2.80/lb through December. In recent days it dropped heavily again and is now just under $2.70/lb. The pressures driving copper down include a strong dollar, a weaker China, which consumes about half the world’s copper, shorting, and a copper market that looks to be in surplus in 2014 – though only just by many accounts – and beyond, analysts say. “Fundamentally markets are still nervous about China from the demand side, and we are forecasting a surplus market this year and next,” BMO commodities analyst Jessica Fung notes in an email. “Physical premiums indicate demand is ok – but not great.” So the price slides and obliterates what had seemed a strong $3/lb floor. The more dour outlook for copper has caused price revisions. BMO recently cut it’s 2015 forecast down from $3.05/lb to $2.84/lb. Fung says copper’s unlikely to climb back to $3/lb this year as an average price. It’s “is a bit of a stretch this year in our view especially with that very strong dollar,” Fung says. Still, some see copper finding a bottom now and recovering soon. Macquarie Group base metals analyst Vivienne Lloyd views the Chinese New Year as marking a potential turning point with buying picking up thereafter. “We see a recovery post-CNY (Chinese New Year) as our balance for this year is just 98kt, which is pretty tight in a 23Mt market,” Lloyd says in an email. “And Q2 is the traditionally strong demand season. The price is still vulnerable approaching CNY, but I believe we are finding the trough here.” As the price falls, miners are now coming under greater scrutiny. It’s not yet a panic. By and large copper miners have enjoyed a healthy profit margin with copper over $3/lb and around $2.70/lb – if quite a bit lower – few market observers see massive issues for miners at this point. That would require a much deeper and persistent decline in the copper price. But the falling price is starting to bite, at least a little, and there is smoke on the horizon. As others, BMO Research notes in a recent commodities overview that at $2.80/lb copper, more than 90% of miners have lesser basic cash costs (BMO’s C1). Yet add more expenses and consider miners according to BMO’s C3 cash costs and the field shrinks to 75%. The C1 midpoint, for reference, is about $1.50/lb. So for now the copper miners are relatively safe. The spectre of widespread mine shutdowns and project delays or cancellations along with painful writedowns is not yet clearly on the horizon at recent sub-$3/lb copper prices. That would take much lower prices. Speaking with Reuters Robert Edwards, CRU consultant on mining costs, pegged $5,000/tonne (or about $2.30/lb) as being very uncomfortable for miners. At that point pressure to close down money-losing mines and delay projects would mount. Likewise, copper prices would have to persist in the mid-$2/lb range for several years to force major writedowns, BMO Research says. “Unlike the precious metals sector, most of the copper producers’ reserves are calculated at prices at or below spot (averaging US$2.65/lb, ranging from US$1.60/lb to US$3.30/lb), so copper prices would have to remain below US$2.65/lb for three years to warrant a notable revision.”
Posted on: Wed, 14 Jan 2015 10:49:37 +0000
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