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Copper Hitting New Six-Year Lows

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Copper Hitting New Six-Year Lows
copper

Among the various industrial metals, copper is one of the world's major commodities. It is used extensively in industry for construction projects, especially as part of energy and heating systems, and is frequently alloyed with other metals in industrial processes. Copper prices have been falling, however, on a number of global cues that range from economic slowdown affecting emerging markets to environmental concerns in two of largest producers in the world.

Copper Price Breaches $5,000 per Tonne

Tracking lower along with the other base metals, copper has been sinking lower ever since hitting its peak (in tandem with the precious metals) during 2011. The metal is often recovered from scrap supplies, and nearly everyone has heard a story about thieves stealing copper wiring from A/C units in order to hawk the copper for melt value. Yet, spot prices briefly slid below the $5,000/t level this week, closing at their lowest since the onset of the financial crisis in 2009. Priced per pound, copper is now trading around $2.30/lb. Prices are down nearly 20% year-to-date.

Although there is a clear downtrend in the entire commodities sector in general, there are some specific factors that are influencing the copper price lower.

China Slowdown

copper_round

For months the financial news media have been obsessed with the apparent slowing of the Chinese economy, and how this will impact the global markets. In the case of copper, the effect is two-fold: China consumes approximately 45% of the world's copper supply, and is also the world's #1 producer of the metal. As exports and new construction projects begin to dwindle in the world's second-largest economy, demand for copper has begun to contract. With most observers convinced that China's economy is in for a "hard landing," it should be no surprise that the country's copper imports slipped by 4% year-over-year from H1 2014. The drop in prices has also prompted copper refiners to raise their smelting fees in order to recoup lost profits.

Disruptions in Indonesia

Another macroeconomic (and political) development that's weighing on copper prices is the rift between the Indonesian government and foreign companies that operate the county's extensive natural resource mining operations. (The Grasberg Mine in Indonesia is the largest open-pit mine in the world.)

Indonesia's Grasberg mine, the largest copper mine in the world. Indonesia's Grasberg mine, the largest copper mine in the world.

Freeport-McMoRan (NYSE:FCX), one of the global leaders in metals mining, has struggled to maintain its permit with Indonesian authorities that allows the firm to extract resources from the country. Over the last several years, Indonesia has been attempting to keep more of its minerals in the country to be refined into value-added products rather than being exported before they are processed domestically. Freeport's 6-month permit expired in July, and all production from Grasberg has been halted.

Outlook for Copper

copperSome analysts are predicting a long slump for copper, advising that prices won't rise significantly for another 5 years. While this is a possibility, don't expect global production to drop too much in the near future, as the largest copper miners are generally able to extract the metal for far less than $2/lb, remaining profitable even at current price levels. This weakness in copper prices could, however, push out a large number of small, independent mining operations being undertaken in China. Commodity giant Glencore (LON:GLEN) has seen its stock price tumble 9% this morning. Moreover, According to the CFTC, trading in copper futures has remained bearish in the aggregate for 10 consecutive weeks and shows no signs of turning around.

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