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.

Glencore forecasts nickel deficit

Kenny Ives, the Director of Glencore nickel commodities department, stated that, the global market of nickel will slide down from 20,000 million tonnes surplus, which went throughout the year 2014, to a balanced trading by the year 2015, and then followed by uprising deficit. With the help of a presentation, Ives explained that, if the export ban by Indonesia will remain to be intact, the metal will soon be in deficit,. In the presentation, he directed the annual growth of demand from the year 2014 to 2019, as 4.5 percent, and at the same time the growth of production was shown as 1 percent, during the same period of time.

The nickel demand growth will increase every year by 4.5 percent, and by the year 2018, the metal will enter into steady deficit, according to the forecasts. He also added that, the price of nickel has not been steady in the years 2014, as at the beginning of the year, the price lingered around about 13,000 dollars per tonne, and by the month of May, the price of the metal hiked up nearly 50 percent to 21,200 dollars per tonne. And by the month of September, along with the value of other commodities declined down to 18,000 dollars per tonne.
The hike in nickel prices was mainly due to the ban imposed by Indonesia, the largest supplier of nickel, on the export of unprocessed ore from the country, which created a sense of anticipation of the decline of the nickel output. Any ways by the end of the year, the Chinese exports, and the export of ore from the Philippines and the macro economic downgrades, led to the decline of the metal.

The matter of an increase in the exports of nickel ore from the Philippines is not possible at the point because, the country has kisser resources than Indonesia. The shipments of nickel ore from the company, would certainly decline by the coming months as the monsoon season in the country would prove to be a barrier for the transportation of ore.

It's Different This Time... Rig-Count Edition

In July 2008, crude oil prices peaked and began to fall quickly. After 2 months they had dropped 30%, but being the smartest extrapolators in the room, producers piled on the rig count driving it higher and higher until around 5 months after oil prices peaked... the rig count completely collapsed. Today, it has now been almost 6 months since oil peaked and began its accelerating free-fall and rig counts have just started to drop (still 2% above the June peak oil levels)...  

There is always a lag... and with permits down 40%, let's just see if it's different this time...

Of course, it's different this time... it's way worse! All these rigs are backed by massive debt loads at drastically lower costs of funding than is possible now... but we should ignore that, right?

Turn a 200kt copper surplus into 1.6mt deficit in 3 easy slides

Glencore says 2015 supply forecasts are way too optimistic and the Swiss giant has the charts and tables to prove it

The copper industry has a long history of supply disruptions.

Typical disruptions associated with adverse weather, technical problems, power shortages or labour activity make forecasting a tough proposition.

To these variables add more recent factors affecting future supply which includes the fall in the price to near four-year lows which makes it difficult for miners to raise development finance (or raise wages for that matter).

That leads to project deferrals, commissioning delays and changes to mine plans and partly explains why the International Copper Study Group's benchmark forecast for 2014 swung from a 400,000 tonne surplus in April to a 300,000 tonne shortage just six months later.

While there's consensus for a small deficit this year, in 2015 even the most skeptical of analysts predict an oversupplied market and a concomitant fall in the price.

Not so fast says Telis Mistakidis, Glencore's copper chief.

Glencore is the world's third largest global mined copper producer and the world’s largest copper supplier.

The Swiss company relies on copper for 38% of its earnings (vs 20% at BHP Billiton and only 10% at Rio Tinto) so it has a lot riding on the outlook for the red metal.

Glencore's presentation to investors in London contained these three slides that shows just how vulnerable the copper supply chain can be:

Written by Frik Els

Workers at Peru's top copper mine to start new strike Wednesday -union

Workers at Peru's biggest copper and zinc mine, Antamina, will start a new indefinite strike on Wednesday to continue pushing for a bonus and other benefits, union leader Jorge Juarez said.

The union ended a 19-day strike on Nov. 30 after Peru's work authority declared it illegal. The mine said the stoppage did not affect production that had been running at around 30,000 tonnes per month.

BHP Billiton and Glencore Xstrata each have 33.75 percent stakes in Antamina. Teck Resources holds 22.5 percent and Mitsubishi Corp 10 percent.

"We are going to start the strike at 00:00 Wednesday (0500 GMT) for the same reasons as the previous strike," said Juarez, the secretary general of the SUTRACOMASA union.

Unionized workers hoped to secure a bonus to offset shrinking proceeds from a revenue-sharing agreement and other benefits as production slips on lower ore grades.

Antamina urged the union to reconsider staging another stoppage.

"The strike it led nearly two weeks ago only hurt the workers, whose salaries had to be reduced as a result of the action," the company said in an emailed statement.

Antamina has said it will probably produce about 336,000 tonnes of the red metal this year, down 27 percent from 2013. 

Antamina, in the Peruvian highlands region Ancash, produces about 30 percent of Peru's copper and 20 percent of its zinc. Peru is the world's third largest copper producer.

Gold price surges as stocks correct

The price of gold spiked as much as $44 an ounce higher in midday trade Tuesday on the back of another day of selling on equity markets and after finding support from a softer dollar and a stronger oil price.

On the Comex division of the New York Mercantile Exchange gold for February delivery was changing hands for $1,232.70 an ounce, up $37.80 or 3.2% from Monday's close.

The gold price jumped out of the starting gates on Tuesday rising to a high of $1,239.00 by 10am EST in heavy volumes of more than 20m ounces traded by noon.

Silver traders followed the gold market higher with March contracts adding over 5% to $17.11, down from a day high of $17.23 an ounce early on.

A correction on global stock markets – some say a long overdue one – after a relentless seven week rally to record highs in the US was the main factor behind gold's strength this week.

Gold's gains since hitting four-year lows early November reached 7.5% today while silver has advanced 10.6% over the same period.

While the drop in the Dow Jones and S&P500 indices was far from dramatic, Chinese stocks were hammered down 8% overnight on increasing worries about a slowdown in the world's largest economy and fears of a return to crisis mode in Europe after trouble in Greece and other peripheral economies saw equity markets in the trading bloc sell off heavily.

Gold has been uncharacteristically strong against a rampant US dollar which jumped to a more than 8-year high against the currencies of its major trading partners following Friday's blockbuster jobs report in the US.

Gold and the dollar usually move in opposite directions, and another retreat in the dollar index and slight improvement on oil markets on Tuesday provided additional support to the metal.

Gold's gains since hitting four-year lows early November reached 7.5% today while silver has advanced 10.6% over the same period.

Speculators in gold futures and options reduced their bearish bets on gold by 16% last week, cutting back shorts from near record levels reached in October and adding to long positions at the same time.

Net long positions held by large investors like hedge funds jumped to just over 79,300 contracts or close to 8m ounces in the week to December 2 according to Commodity Futures Trading Commission data.

Unlike hedge funds retail buyers did not increase their exposure to gold

That's more than double the number of bets that prices will rise held by speculators a year ago, when gold was hovering near the same levels.

Silver price speculators cut bets that the price will fall by 23% increasing their net long position substantially.

The rally in precious metals over the last month hasn't convinced investors in physical gold and silver-backed exchange traded funds however.

Unlike large investors retail buyers of gold remains negative about gold prospects and have been selling into rallies. The latest weekly data show the holdings of gold and silver ETFs dropping again.

Net sales were modest – only 4.6 tonnes – but did drop overall holdings back to five-year lows of 1,610.8 tonnes. Gold bullion holdings hit a record 2,632 tonnes or 93 million ounces in December 2012.

Outflows from gold funds are nowhere near as dramatic as 2013 when 800 tonnes were pulled out, but year-to-date gold ETFs have experienced outflows of 152 tonnes, an 8.6% drop.

Investors in silver continue to reduce their exposure to physical silver-backed ETFs which at the start of October reached a record 20,182 tonnes.

Last week 134.2 tonnes left silver funds reducing total holdings to 19,846 tonnes, but so far this year silver vaults have added 470 tonnes or 7.8%.

This is why India needs a gold policy — WGC

India, the world’s second largest gold consumer after China, should start a bullion board to regulate trade and a spot exchange to offer uniform prices across the country, according to the World Gold Council.

In a study published Tuesday, the market development organization for the gold industry outlines seven key policy recommendations to monetize the 22,000 tons of gold stocks kept by Indian households:

1.     Establish an India Gold Exchange to ensure pricing standardization, increase transparency and improve supply and demand analysis.

2.     Establish a Gold Board to manage imports, encourage exports and facilitate development of the infrastructure needed to ensure the Indian gold market functions to maximum effect.

3.     Develop accredited refineries in line with international standards including upscaling the current domestic refineries.

4.     Allow Indian banks to use gold as part of their liquidity reserves. This would incentivize them to introduce gold-based savings products.

5.     Drive monetization of gold by incentivizing banks, revitalize Gold Deposit Schemes, introduce gold-backed investment and savings products.

6.     Create a more active marketing strategy for Indian handcrafted jewellery. This could boost exports and highlight India’s expertise in this highly-valued sector e.g. by promoting handcrafted ‘India-made jewellery’ like the Swiss-made watches.

7.     Drive the standardization of gold so that buyers and sellers can have faith in both the quality and price of their products. Introduce guidelines for compulsory quality certification of all forms of gold to encourage accountability and foster an environment of trust.

The report also assesses the policies adopted in countries like Turkey and China, which have faced challenges similar to India, but chose to devise public policies to monetize the local stock of gold. Here, some of the key findings: