Copper has entered bear market territory as it falls 21% from a high of $3.9785 in February 2012. Prices have been in decline for much of this year as investors wagered that supplies would overwhelm demand.
Copper, also know as Dr. Copper, as the metal is considered a key barometer for the economy and gauges the health of global manufacturing, has seen its biggest decline in 18 months.
"Copper is telling us right now that all is not well with the economy," said Mett Zeman of Kingsview Financial. "If people still look at copper as a barometer of economic activity we're in for some rough times ahead."
The economically sensitive base metal reached bear market status – defined as a drop of 20% or more – on Friday April 19. It has since declined together with gold and silver.
Fear escalated as the International Monetary Fund downgraded its global growth forecasts. Global growth has continued to remain sluggish – China's economy has grown by less than 8% in the last four quarters. Though the country is still one of the fastest growing economies, it has grown less than expected.
According to a preliminary survey by Reuters, growth in China's factory orders dipped in April as new export orders shrank, suggesting the world's second largest economy was beginning to face economic headwinds.
"The copper price will ultimately be determined by how the Chinese economy performs since it now represents the single largest consuming country representing 41% of global demand which is up significantly from 20 years ago when it was only 8%," said Manav Garg, CEO of Eka, the parent company of Calgary-based energy company EnCompass.
Stockpiling impact
The price dropped further as news came that shipments out of Zambia, Africa's biggest copper producer, have resumed after a two-week break because of a road accident. The additional supplies will add to the stockpiles of extra copper. The amount of metal held in warehouses overseen by the London Metal Exchange jumped 92% to 614,350 tons this year.
The drop in the current price of copper and in copper futures has seen weakening profits for many Canadian-based mining companies. Vancouver based Teck Resources (TSX:TCK.A and TCK.B, NYSE:TCK) have seen profits slashed from $554 million in the first quarter of 2012 to $328 million in the first quarter of 2013.
The company said the declining price of copper and steelmaking coal was to blame for poor profitability.
"Sales volumes for copper and zinc were similar to last year despite various operational challenges," said Don Lindsay, president and CEO of Teck Resources.
"However, with continuing uncertain global economic conditions, prices for all of our major products were down compared to the first quarter of last year resulting in lower profits and cash flows."
Barrick Gold (TSX:ABX; NYSE:ABX), the world's largest gold producer, which also mines copper, has also been hit hard by the decline in commodities prices.
The company announced April 23 that it's planning on cutting US$500 million on spending for major projects. Barrick said the main reason for a decline in profits was lower gold and copper prices combined with reduced volume sold.
The decline will most likely hit the junior mining sector hard. "For those companies it's more of a question mark as to weather they are able to raise the capital to continue with their projects," said Karina Brino, president and CEO of Mining Association of BC.
Better view long-term
However, not all mining companies are battening down the hatches. While lower copper prices will always hurt profitability, Jim O'Rourke, CEO of Copper Mountain Corp. (TXS:CUM), which has a large copper mine near Princeton, B.C., still sees the market as attractive.
"I think anything above the $3 [per pound] mark is attractive to us, once we've recorded our costs, which are in the $2 range. From that point of view we are comfortable with it at the $3 range, though we would prefer it to be $4," he said.
Even with the recent declines and global economic uncertainty, Copper Mountain still remains positive on the long-term price of copper.
"I suspect that copper will recover when the general market recovers," O'Rourke said. "Copper is a commodity that is required. There are lots of expansions in various parts of the world including India and China, and as they develop more cars and houses they will need copper. We still remain comfortable with the copper markets."
One reason for the positive long-term outlook for copper prices is that Rio Tinto has stated that its Utah mine, which is the largest copper mine in the world and was due to contribute to 1.3% of globally mined copper, will produce 20% less copper after a substantial landslide. Analysts expect that it will take six months to a year to clear the debris.
"The loss of this amount of copper also serves to keep the market that little bit tighter, just at a time when some market forecasts felt that a meaningful surplus was about to emerge in the copper market," Nomura analyst Sam Catalano said in the Financial Times.
