In a recent article one Sunday, I wrote; “Please Don’t Send Panic Signals in the Markets, everything will be just fine soon…”
But if you are like my colleague who called me early morning Tuesday, you are worried about copper after reading the Cavmont Bank update on copper prices that was captured in the Daily Nation of the same Tuesday 15/09/2015, please don’t panic. It’s still too early to call.
So let’s take a deeper look at copper behaviour than our colleagues at Cavmont Bank have done and see where the copper market is heading. This time, I’ll try and pinpoint everything you need to know.
You may recall in my article I shared with you some ideas that pointed to why we are likely to see stubbornly low copper prices for a long time, remember I said China reversed from low priced export driven double digit growth rates to internal consumption driven growth and the plan hasn’t quite worked out as planned so they have gone back to a mixed grill growth model?
Yes, in fact I said copper prices won’t show up until we are about end of 4 qtr. 2015.
I am also sorry, because after I said that all the copper that has ever been mined is still available somewhere in the world and is always continually coming back in the market as recycled copper to make up the 15-19 million tons that is consumed every year or as others say…creates what we’d call a surplus of supply in the market, I also forgot to mention the effects of “hedging,” or “selling forward” as the other factor that was causing current downward pressure on copper as prices tried to creep up back toward say breaking through the US$5,500- US$5,700 barrier since my article. But you see, you can’t cover everything in a Sunday article.
So, what’s been happening so far is that as the price of copper starts to creep towards above the US$5,500 mark, which may be soon, I bet we’re going to see continued pressure on prices.
That’s because as soon as the price gets reasonably ‘helpful,’ recycling companies, most whom, if you remember, bought lots of scrap copper,(some stolen ZESCO and ZAMTEL cables right here at home etc) when prices were high, will be clamouring to sell their production forward.
And when they sell, copper prices will feel the pressure. Let me explain for the benefit of colleagues who may not be familiar with the terms.
What is meant by “selling production forward” is that producers can agree to sell their current production for a higher price in the future, regardless of the spot price at the time.
That allows them to lock in a profit on that production, even if copper prices fall over that time.
Let’s take an example…
If, as reported by Cavemont Bank, a ton of copper sells for US$5,340 today but the buyer thinks copper prices will soon rise to say US$5,700, he can make an agreement with the producer to purchase copper at US$5,500 at a future date—say US$200 lower than what he expects to pay in the near future.
In other words, he can buy copper worth US$5,700 per ton for only US$5,500 per ton if he guesses right.
If both parties agree on US$5,700, the copper producer can lock in a US$200 profit on today’s copper at US$5,500 per ton, even if copper trades below US$5,500 on the future date they agreed to.
So the producer can sell his copper for US$5,700 in the future, even if copper is actually at US$5,340 or even lower at US$5,200, at the time as we’ve seen in the Cavmont update.
Meanwhile, the buyer can also book a US$200 profit if he’s right and copper prices actually rise to US$5,700 per ton.
And that type of action is exactly what we’ve been seeing when copper tries to creep back up above US$5,340 as per Cavmont Bank report that has reported a downward trend.
That’s when the forward selling has begun. And copper prices fall right back down.
So forward selling, or hedging, has put downward pressure on copper prices because producers a selling when prices start to tinker to above US$5,340. And there’s a good reason it’ll happen again when prices ratchet up to try to go toward US$5,500 again.
The other factor putting pressure on copper is that all that mountain of scrap copper that was collected or stolen all over the world and sold and brought into the market when prices were high, remember the US$10,000/ton record prices?
Yes, the cost of buying stockpiled scrap copper when prices were high and producing it as recycled copper is falling compared to virgin copper production costs at say First Quantum, KCM or Mopani mines —all across board.
That means breakeven prices, depending on mining and metallurgical extraction methods, are likely lower than they were a couple of months/years ago.
These lower production costs for recycled copper and even for virgin copper production in countries with lower input costs (unlike Zambia with huge production materials lead times and inland transportation as well as expatriate labour costs as the case may be), we see that those lower cost countries can easily crank production and still make a profit, even when spot prices continue to drop. That’s also putting downward pressure on copper.
Simply put, I concluded in my other two articles on these very pages in June this year “Zambia Must Innovate or Die” followed by another the following Sunday “Why should Zambians Invest in Research and Development,”… on average, I believe well run –well invested mining companies with innovative mining methods that are well grounded in Research and Development that have bought or been given for free by the Zambian government all these new “good rocks”, as we used to say in mining jargon when we saw excellent copper assay results coming in from the assay department those days, being discovered in North Western Province, any serious miner, and we mean even a group of armature miners, can still produce copper at “The 90th percentile, measured at $4,763/Mt [$2.16 per pound],” that still gives the industry some space for further price decline today. www.mining.com—new-projects-need-3-50-copper-price.
And with copper prices currently at US$5,340 which gives Zambian miners lots of change considering their kwacha based mining costs in the face of a historic 50%, depreciation of the kwacha to the dollar should mitigate any adverse increases in kwacha based petroleum, electricity and all local labour costs… that dynamic is very much in play.
“Add it all up and what we’re seeing today is a rewriting of the new equilibrium for copper prices. This is uncharted territory—and we’ve got a front-row seat.”
But it’ll be a foolish management that decides to cut production and justifies kwacha based labour lay-offs on Zambian mines even when faced with copper prices nowhere near the 90th percentile…