What’s Ailing Copper?

November 30, 2007

Even earthquakes and labor strikes can’t support the flagging price of copper.

  • Housing is hurting, but it’s not critical
  • Exploring the correlations between copper and stocks
  • Prices may bounce back in January

Sometimes even an earthquake can’t move a market. Other times sentiment can shake it to its core. Go figure.

On Nov. 14, a 7.7 magnitude earthquake in the epicenter of copper mining, the Antofagasta region, home to Chile’s 50,000 ton-per-year Michilla copper mine, briefly shut down power to the mines. Miraculously, only one person was killed, and most mines were back up the same or next day.

Then last week, union workers staged a walkout at BHP Billiton’s copper mines, including the Cerro Colorado copper mine, which was also affected by the quake. Cerro workers rejected a new contract offer back in February of this year. (Ironically, the October unemployment rate in Chile was exactly 7.7 percent.)

Chile is the world’s largest producer of copper, exporting $12 billion of the stuff last year. Yet despite the earthquake and labor strikes threatening supplies, copper prices have been in a persistent downtrend recently. What gives?

“The earthquake in the Anto region didn’t have much of a lasting effect,” agrees Michael Jansen, metal strategist with JP Morgan, in London. “But it does reinforce the market's view that mine infrastructure in Chile is at risk of getting a little tired, especially in light of the fact that it has been running at max capacity for two-to-three years in response to the high price environment.”

And the labor woes? “Labor disputes reflect the max capacity side of the industry and will continue to be a feature,” says Jansen. “Copper has been on a multi-year decline in first use processing capacity (semi-fabrication) in the US. The loss...reflects operating costs and end user demand location more than anything else.” Contributing to labor dissatisfaction is that, “the proceeds from the mining boom are not as evenly spread in Latin America as in some other countries.” Jansen expects these disputes to continue.

The mortgage credit crunch and drop-off in home building in the U.S. are two elements analysts point to in explaining the downward trend in pricing, but Jansen’s not convinced. About 350 pounds of copper go into one residential construction unit, he says. With residential building taking a battering in the U.S. right now, that market crunch is costing copper about 800,000 units per year. “But that’s still not that important,” he says.

“Far more relevant is the role U.S. housing plays in driving sentiment,” says Jansen. Moreover, he notes, the correlation between copper and the equities markets, which have also taken a beating from the credit crunch, is “extremely high.”

But seasonal cycles are also dragging copper prices down. “We’re entering the annual season where large stockpilers, such as China, destock,” because copper is too expensive to hold or maintain in inventory, says Jansen. There’s a cyclical “tightening and loosening of the purse.”

“We had a similar situation last year, in December and January,” he notes. Yet prices still rose from a low of $5,200 to $8,300 per ton.

Jansen expects a rebound in prices in the first of this year as buyers restock, although not to the levels seen in 2007. Things should settle out at “a comfortable $7000 range,” he says.

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