Friday, December 12, 2014

What Do Falling Oil Prices Mean for Copper?

What Do Falling Oil Prices Mean for Copper?
Oil prices have taken a dive this year, and far from occurring in a vacuum, that poor performance is likely to have a ripple effect on other commodities. Copper, which has been sitting below the $3 mark lately, is just one metal that could be vulnerable to the effects of weak oil prices.
As a recent article from Bloomberg explains, energy needs make up as much as 50 percent of the production costs for metals. That means cheaper oil should lead to lower production costs, which in turn should allow copper producers to hold up a bit better against falling prices.
Michael Haigh, head of commodities research at SocGen, told the publication, “[t]here’s been a structural change in oil, and there’s more to come. This will also ripple through other commodity markets, in some cases directly, and others indirectly.”
Remaining profitable
The ability to stay resilient under difficult conditions isn’t necessarily a bad thing. Although seeing copper at $2.90 might be uncomfortable for many base metals investors, it’s worth noting that plenty of copper projects will still stay afloat at those prices.
Back at the start of September — when oil prices were still a little higher than they are now — Stefan Ioannou of Haywood Securities told Copper Investing News that even higher-cost producers were still managing to stay profitable at $3 copper, and suggested that copper “would probably have to drop below the $2.50 range before impacting existing production associated with the upper end of the copper cash cost curve.”
Copper supply and demand
However, there’s another side to that issue that’s worth mentioning — falling costs can create a supply problem. In theory, lower prices for any commodity should shut out higher-cost producers, restricting supply and eventually driving prices up. However, if production costs keep going down as well, and demand doesn’t increase, all that supply stays on the market, and the bottom keeps moving lower and lower. That’s what’s happened with coal, according to Joe Aldina of Wood Mackenzie, who gives a good overview of the issue here.
Still, although some have pointed to a growing copper surplus, others are not so sure. While copper prices certainly haven’t had a breakout year, issues such as ramp up delays, growing impurities in copper concentrate and demand indicators are all factors worth considering.
Certainly, the teams at Thomson Reuters GFMS and the International Copper Study Group (ICSG) are still predicting a surplus in the near term, but those positive on copper are quick to note that the ICSG has drastically cut its forecast. In any case, investors will certainly be keeping an eye out to see how cheap oil will affect copper miners.
As of 5:15 p.m. EST on Wednesday, copper was trading at $2.895 per pound.

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