Copper Prices Could Fall Further This Year

Copper prices have already fallen around 10% so far this year on the back of a slowdown in China. However, prices could drop even more, according to a new report by Thomson Reuters GFMS. The outlook doesn't come as a surprise though, given that several major copper mining companies such as Freeport-McMoRan Copper & Gold (NYSE: FCX  ) , BHP Billiton  (NYSE: BHP  ) , Chile's Codelco, and Glencore Xstrata have been planning to expand their production capacity even though the Chinese economy is seeing a sharp slowdown and there are no signs of a major stimulus package.

Copper prices have further downside
After falling nearly 10% in the first quarter, copper prices could fall even further later this year, according to a report from Thomson Reuters GFMS, a metal consultancy firm. In its latest report, Thomson Reuters GFMS has warned that copper prices could fall below $6,000 per ton in the second half of this year. The research firm cited the supply glut and slowdown in China -- the world's biggest consumer of copper -- as reasons for a further drop.

This means that copper prices could fall another 10% from the current level in the second half of this year. Such a significant drop would have a serious impact on miners' margins. Although major miners will still find it profitable to mine at a price of around $6,000 a ton, their cash flows will be negatively affected. Despite this scenario, miners still plan to expand their capacity and increase output.

Major miners to expand capacity and increase output
Earlier this month, the world's largest copper miner, Codelco, announced that it could tap Chile's sovereign wealth fund in order to raise $20 billion for increasing production capacity by 10% this decade. The Chilean giant fears that lack of investments at this juncture could halve its total output.

Apart from Codelco, several major miners plan to increase capacity and output. Rio Tinto is increasing output at its Oyu Tolgoi mines in Mongolia. Rio started production at Oyu Tolgoi, one of the largest copper mines in the world, last year.

Freeport is planning to increase its total copper production by 7% in 2014. The company said earlier this year that at its biggest U.S. mine, Morenci, it is expanding mining and milling capacity to process additional sulfide ores identified through exploratory drilling. Morenci's copper production is expected to reach 1 billion pounds in 2015, compared to 564 million pounds in 2013. Freeport-McMoRan is also expanding capacity at Cerro Verde. The company has a 53.56% interest in Cerro Verde.

Southern Copper (NYSE: SCCO  ) had said earlier this year that it plans to invest $2.3 billion in capital projects this year, which represents an increase of $600 million when compared to 2013 figures. The company's investment program aims to increase copper production capacity by approximately 87% by 2017. For 2014, the company expects to produce 672,400 tons of copper, up from total copper production of 637,068 tons in 2013.

BHP Billiton recently reported that for the nine-month period ended March 31, 2014, its total copper production increased by 2% to 1.3 million tons. The company has kept its copper production guidance for the fiscal year ending June 2014 unchanged at 1.7 million tons despite the sharp decline in copper prices in the first three months of 2014. The company also noted that its Escondida mine is on track to produce 1.1 million tons of copper in the 2014 financial year, and production is expected to increase to approximately 1.3 million tons in the 2015 financial year.

The global mined copper output, which rose about 8% in 2013, is expected to continue to rise in 2014 as miners expand capacity and increase output. According to GFMS, this demand-supply fundamental will be further distorted, making a surplus of about 400,000 tons or 2% of total consumption. Moreover, the report also added that refined copper inventories lying in coastal duty-free warehouses in China had climbed to 1 million tons as of February.

China factor
Copper prices peaked in 2011 thanks to a strong demand from China. This encouraged global miners to invest heavily on capacity expansion. As a result, copper supplies are now increasing sharply. At the same time though, the Chinese economy is seeing a slowdown as it shifts from investment-led growth to consumption-led growth. It is not surprising then that the outlook for copper prices has turned bearish. The only hope for copper miners is a major stimulus package from China.

Chinese authorities have already announced some minor measures such as building railways in lesser developed regions and tax relief to small enterprises. Such measures, as I discussed in previous articles, will hardly make any impact on copper demand. Copper prices may find some support only if China decides to take drastic fiscal measures, such as the one it took following the financial crisis of 2008. However, that doesn't look likely at the moment, as despite the slowdown Chinese policymakers have remained focused on rebalancing the economy.

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