The chart looks alarmingly like that of iron ore or oil and has many wondering what is behind the move. The price of copper is now at a 5 ½ year low and it appears that $6,000 per tonne was the level which really triggered the selling, particularly in Asia. There appears to be two main reasons for the sell off:
a relentlessly stronger US Dollar….
…and weaker global growth prospects as per the International Monetary Fund.
Last night the IMF adjusted their global growth forecast for 2015 from 3.4% growth to 3% (Officials had originally forecast 3.9% growth in 2015!). With Japan in its fourth recession since 2008, the Euro Zone teetering on the brink of deflation, and widespread concerns around the sustainability of China’s infrastructure-led growth model, it’s not hard to see why the IMF revised their forecasts.
With respect to the strong US Dollar, a strengthening USD makes it more expensive to purchase copper in currencies aside from the USD. So if the USD has strengthened 10% against currency X and a company domiciled outside of the US which uses currency X needs to purchase copper, they will pay 10% more than what they used to. In an environment of slack aggregate demand, it becomes very clear how currency fluctuations can enhance or destroy a company’s financials. Scenarios like this may be the “other shoe to drop” on the global economy.
Other industrial metals were hit as well, though not as hard as copper:
It’s important to remember that the global economy is forecast to expand – not contract - in 2015. This makes the violent move in copper seem somewhat overdone in that context. Nonetheless, a ratcheting down of global growth prospects of .4% in a $70 trillion global economy (in nominal terms) accounts for a lot of raw materials, hence the reaction in the financial markets. To put this in perspective, the downward revision is the equivalent of erasing a country the size (in terms of GDP) of Chile off the map.
Another positive note (and major difference between copper, iron ore, and oil) concerns the issue of excess supply. Though many are forecasting a slight oversupply of copper over the next two years, this excess is nowhere near the supply gluts currently killing both the iron ore and oil markets. Given participants’ statements in the iron ore (Rio Tinto, Vale) and oil markets (OPEC) to continue with current production trends, those gluts appear set to remain in place.
This does not appear to be the case in copper, but we shall see.
With respect to copper mining companies, the decline in the price of copper has hit particularly hard With Freeport McMoRan (FCX:NYSE) down over 14%, Glencore (GLEN:LON) down over 10%, and Antofagosta (ANTO:LON) down over 4% as I write.
As I have said many times before, focusing strictly on rising commodity prices is a wrong-headed approach. In the current environment with excess capacity overshadowing the healthy long-term demand profiles for many metals, focusing on low-cost opportunities is crucial. The below chart gives a good overview of what the cost structure of copper mining looks like currently:
Despite copper’s sharp drop, much of the industry appears able to operate at all-in sustaining costs (AISC) substantially lower than where the copper price currently rests today. It is clear that the fall in the copper price will have many in the industry scrutinizing profitability of specific projects and this is only natural given the uncertain economic backdrop. The fall in the price of copper doesn’t make it any less ubiquitous in the global economy, but does strongly reinforce the need to scrutinize the cost structure of copper companies across the entire value chain from junior, to developer, to producer.
In September 2014, I wrote a note titled “Commodity Capitulation: A Blip or the Start of Something More?” It appears that Dr. Copper weighed in last night. The long-term prospects for copper don’t appear to match up with the current price performance, but until a new equilibrium is set, caution is warranted.
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