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Copper Prices Fall to All Time Low in Five Years, Raises Fear of Production

The drop in copper prices by 6 percent at the start of 2015 has compounded the imminent uneasiness in the stock market’s metal sector. 

Copper Prices Fall to All Time Low in Five Years, Raises Fear of Production

The value of high-grade copper from East Asia that is set to be delivered in March dropped by 16 cents or an equivalent of 5.9 percent down to $2.49, the lowest price value since 2009

In the London Metal Exchange, copper prices fell by 4.8 percent and by 5 percent on the Shanghai Futures Exchange.


Slow growth and over production

The decline of copper prices in the past few months can be largely attributed to concerns over slow consumption in China and an oversupply of the metal, a move that has stoked jitters among investors.

A negative performance of copper is seen as a prediction of things to come in terms of the performance of the economy. Copper is used in most manufacturing and construction activities that have an impact on the economy. 

Many market analysts render a bullish outlook to the direction of the global economy. However, the performance of copper could put a dump on this outlook.  Indeed, the World Bank sliced its growth predictions for the global economy in 2015 as a result of a slow recovery in the Euro zone, in many emerging economies and most significantly in Japan.

However, the current slump in copper prices may not be adequate to cause miners to drastically cut down on production. The decline comes along with a similar slump in oil prices, causing significant apprehension among investors. Is this slump a reflection of the economic performance in 2015?

The 60 percent slump in oil prices has already triggered producers to cut back on production plans. However, it is unlikely that copper miners will scale back on capital spending, allaying fears of a production slump for the metal.

Robert Edwards of metal costs consultancy firm CRU reports that miners will probably start to feel the pain when the price of copper comes down to $5,000 per ton. At this price level, most producers in the world would be incurring large losses and will likely resort to significant cutbacks in production.

Presently, only the 90th percentile or just 10 percent of producers are leaking profit. This 10 percent is typically a marker of the performance of the commodities markets.

Although production is unlikely to be significant yet, some producers are already feeling the pain.  Antofagasta is wrapping up its operations in Michilla, Chile while Barrick Gold Corp may close down its Zambia Lumwana mine if the royalty rate hikes up from 6 percent up to 20 percent.

Bruce Allway of GFMS says, “If, as anticipated, copper prices continue to be under pressure in the coming months of 2015, high cost producers may also cut back on production.”

Impending Financial Crisis?

Although the prices of copper began to slump in mid-2014, the rate of decline has accelerated since the start of 2015.  Some market analysts are just short of equating this to the financial crisis of 2008 when prices of copper fell lower than $3,000 per ton due to low demand in the construction and car manufacturing industries.

However, it could be too early to make comparisons to the 2008 global financial crisis. At the height of that crisis, miners wrapped up major operations but they were slow in doing so even though they were incurring losses. In the current slump, prices have fallen at a much lower rate amid low demand in China.


Market impact

·        The slump in copper prices can be traced back to the economic dynamics in China. The Chinese regime is striving to weaken its currency to put a dump on the popularity of the USD/CNY currency pair.

·        Commodity traders should monitor the prices of copper and future contracts. It is likely that the stock value of major production companies will remain stable as demand in China gradually spikes up.

·        However, it is worthwhile noting that for the past 12 months, copper has been the worst performing non-energy raw materials, with a lot of investors opting for other better performing commodities.

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