Copper prices fell to a three-year low in March and although they have recovered a little since then, an FT article reports that miners responsible for 10 percent of global production are losing money. We went into China’s role in copper pricing in Part One.
While the copper price has been falling since 2010, the cost of getting it out of the ground has continued rising. Production costs have increased since 2003 due to high energy prices, wage inflation and falling ore grades – both at existing mines and at new deposits opened when the copper price was stronger.
In addition, miners have been hit by the fall in prices of by-products from copper production, including gold, silver and molybdenum, according to the FT. The current price of around $6,680 per metric ton is barely above the $6,613-per-ton minimum operating costs of the so-called “90th percentile” copper mines – those that produce the 10 percent of global output at the highest expense, according to CRU Group, as quoted in the article.
The big boys – Codelco, Freeport-McMoRan, Glencore Xstrata and BHP Billiton – have been moving down the cost curve as prices have eased. Indeed it was Glencore’s top priority to maximize cash flow and reduce operating cost after it took over Xstrata, a strategy it has pursued very effectively, so the pain will be felt first by small producers, the FT says, especially in China and, to a lesser extent, in Chile.
The majors have an average cash cost plus sustaining capital expenditure of below $5,000 per ton, but some of the smaller players are over $6,500 per ton.
What This Means for Metal Buyers
Yet opinion remains divided on how supportive the cash cost of production will be and how bearish the potential slowdown in China will depress prices.
Investec sees the copper price back to $7,000 by June and $7,165 by the end of this year. Goldman Sachs, however, is calling the direction down, saying prices could fall as low as $6,000 a ton this year.
Interestingly, Reuters’s chartists agree, saying copper is expected to test a support at $6,049 per ton in Q2, with a good chance of breaking below this level and falling to $5,638 per ton.