A worker monitors a process inside the plant at the copper refinery of Codelco Ventanas in Ventanas city, northwest of Santiago January 7, 2015. BMO Nesbitt Burns estimates that there is a surplus of about 450,000 tonnes on the copper market.RODRIGO GARRIDO/Reuters
The commodities rout has spread to copper, sending the industrial metal into a tailspin on growing fears of a weakening global economy. The red metal plunged 5.2 per cent to $2.55 (U.S.) a pound, a price not seen since 2009, when financial markets were in the grip of a global economic crisis.
Copper has been sliding for a few years amid a slowing Chinese economy and an increasing surplus of the metal.
But the sudden and sharp drop on Wednesday – copper lost as much as 8 per cent before recovering slightly – shocked markets already reeling from oil's free fall.
"It's difficult to find any fundamental reason for the dramatic slump except fears about demand have been underlined by the growth outlook lowered by the World Bank this morning," said Robin Bhar, head of metals research at Société Générale.
The World Bank cut its economic forecast for this year and said the stronger U.S. economy would not be enough to boost global growth.
Copper, used in all sectors from construction and power generation to cars and electronics, has long been viewed as a bellwether for the world's economic health.
Commodity analysts also pointed to a bevy of other reasons for the steep decline, from short sellers to investors selling copper funds to weak economic data in Europe.
But the reality is that China, which consumes about 40 per cent of the world's copper, is not gobbling up enough of the red metal already on the market.
BMO Nesbitt Burns estimates a copper market surplus of about 450,000 tonnes.
More copper started trickling into the market last year. Canada's Hudbay Minerals Inc. started its new mine in Peru and U.S.-based Freeport-McMoRan Inc. increased production at one of its American mines. As well Indonesia weakened its raw-material export ban, which allowed Freeport and others to resume shipping copper out of the South-Asian country.
And more material is expected to come on stream with the development of China's Las Bambas project in Peru and Wanbao Mining Copper Co.'s mine in Myanmar.
"We can understand why the market is so negative because there is nothing from the supply demand side that is providing any support," said Jessica Fung, commodity strategist with BMO.
As well, most copper producers can still make money. That means miners have little incentive to cut production or shelve projects, which would reduce the world's supplies and in theory boost prices. Hudbay, for example, is on track to ramp up its mine and said it would cost on average just over $1 to produce a pound of copper. "The growth for us is necessary because it drove down our cash costs," said Hudbay's chief executive, David Garofalo.
Wood Mackenzie, a resources-focused research firm, said it did not expect a substantial number of mines to cut back at current prices. "Even at a metal price of around $2.50 a pound, 95 per cent of the global copper mining industry is still operating at a profit," said Paul Benjamin, principal copper analyst with Wood Mackenzie.
However, investor sentiment is dismal as the world deals with the third year of the commodity downturn. Copper has retreated from levels above $4 a pound four years ago. Iron ore and metallurgical coal, both used to make steel, have lost 60 per cent of their value since 2011. Gold has lost 30 per cent of its value over the same period. Oil is in free fall and is now trading around $48 a barrel compared with $100 last summer.
The biggest copper producers, Freeport and Glencore PLC, lost more than 10 per cent Wednesday. In Canada, First Quantum Minerals Ltd. lost 13 per cent to $11.70 (Canadian), HudBay fell 12 per cent to $7.85, Capstone Mining Corp. slid 19 per cent to $1.29 and Lundin Mining Corp. fell 11 per cent to $4.18.