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Copperpocalypse Approaches?

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Copperpocalypse Approaches?
Source: globalspec.com Source: globalspec.com

It's been a rough year for precious metals and commodities generally. However, it's the industrial metals that have gotten the brunt of the damage. Industrial metals like copper and nickel are seen as bellwethers of the global market for raw materials due to their widespread use in construction and other "real economy" activities.

So far this year, copper has lost an eye-popping 26%.

On Thursday alone, copper futures were down more than 2%, sinking to $2.17 per pound for December delivery. For reference, the copper price was over $4/lb as recently as 2011.

copper_futures Copper futures prices (ยข/lb) over the last year. Source: Bloomberg

Here are some of the main developments in the slumping copper market.

China

China, with its two decades of unabated economic boom, is an enormous consumer of copper. With all of the manufacturing done in the country, along with the (now gradually slowing) boom in new building projects, the country's consumption of the red metal is slumping. Copper imports were down 19% year-on-year in October, as indicated by Chinese customs data. Domestic consumption has been waning, causing local premia on copper to fall by a staggering 40% in just the last two months.

copper_coilThis indicates that demand for copper imports is dwindling, as well. Just a few months ago, the perceived value and utility of the metal was so widespread, plenty of Chinese citizens were keeping spools of copper wire in their garages as collateral for personal loans!

China isn't the only country in the region where businesses are adjusting to the lower price environment. The Japanese firm Pan Pacific Copper Co. recently cut its own fees by 9%. Meanwhile Chile's Codelco, the largest copper producer of 2014, recently surprised the markets by laying off more than 4,000 workers at its mines in an effort to aggressively cut costs. The outraged reaction from unions and other groups in Chile is understandable, as the country was far-and-away the world's top copper producer last year, more than triple the next-closest country (China).

Glencore, et al

no-miningThe major miner Glencore (LON:GLEN) has been devastated by the downturn in copper. The company is planning to cut its costs by shuttering a pair of copper mines for 18 months. This, however, has sparked conflict with the Zambian government, who obviously wants the mines to stay up-and-running (so they continue to pay taxes). Even though Glencore has said it wants to use the stoppage to sink $950 million into refurbishing the mines, Zambia's leaders have vowed to quickly find new tenants if Glencore won't keep the mines operating.

Vedanta Resources (LON:VED) has also received blowback from the authorities in Zambia for attempting to close some of its copper mines located in the country. In fact, government officials are being pressured by local trade unions to seize the mines and nationalize them in the event that Vedanta tries to shut them down.

El Nino

There is also the impact of the El Nino weather pattern, which has particularly disrupted the normal rain cycles on the other side of the Pacific. In particular, electricity shortages and power disruptions have been the main culprits. Freeport-McMoRan (NYSE:FCX), the world's second-largest copper miner by output, has encountered this problem at its mines in Indonesia. In addition to power outages, the drought has also dried up reservoirs used for processing ore.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

About the Author

Everett Millman

Everett Millman

Analyst, Commodities and Finance
Managing Editor

Everett has been the head content writer and market analyst at Gainesville Coins since 2013. He has a background in History and is deeply interested in how gold and silver have historically fit into the financial system.

In addition to blogging, Everett's work has been featured in CoinWeek, Advisor Perspectives, Wealth Management, Activist Post, and has been referenced by the Washington Post.

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