Risk-Off Can Lead To Shortages- Freeport McMoRan Closes A Mine In The U.S.
Apr. 20, 2020 7:55 AM ET
Risk-off sends copper lower.
Mine closures in Peru and the U.S.
Copper can rally, and the shares of producers could fall.
A sign of weak demand in the copper market.
FCX shares have plunged, but copper producers may undergo a period where traditional correlations do not work.
One New Year’s Day in the U.S., the economy was growing at a moderate pace, and unemployment was at its lowest level since the 1960s. Optimism over a “phase one
” trade deal between the U.S. and China and a resolution to Brexit at the start of 2020 lifted the price of copper, but the outbreak of Coronavirus created a black swan event that caused the global economy to come to a sudden halt.
The daily chart of nearby May COMEX copper futures shows that the price of the red metal hit its high for the year on January 16 at $2.8930 per pound. Copper’s peak came the day after the U.S. and China signed the “phase
one” deal. During the height of risk-off conditions in the global markets, copper traded to the lowest level since 2016, when May futures fell to $1.9725 on March 19.
Monetary and fiscal stimulus stabilized markets, and copper was trading at around the $2.34 level on Friday, April 17.
Mine closures in Peru and the US
Aside from the unprecedented levels of stimulus from central banks and governments around the globe, mine closures have also supported the price of copper over the past weeks.
Glencore PLC (OTCPK:GLNCY
) sold the Las Bambas copper mine in Peru to Chinese miner MMG Ltd. in 2014 in an all-cash deal worth around $7 billion. In early April, MMG declared force majeure on supplies from the Peruvian copper mine as Peru declared a COVID-19 emergency.
In the US, Freeport McMoRan (FCX
) suspended operations at its Chino copper mine in New Mexico indefinitely because of the spread of the virus.
The mine closures are not like the last as Coronavirus continues to spread around the globe like wildfire with no effective treatments or a vaccine.
While demand for all industrial commodities has evaporated over the past weeks, the price of copper bounced on supply concerns. Even if copper rallies further, share prices for copper producers could fall as they cannot extract the metal from mines to take advantage of the price bounce. In another example of Murphy’s Law in the current environment, the plunge in oil and energy prices is lowering the cost of production for copper and other commodities. However, if the mines cannot operate, the companies cannot take advantage of the lowest crude oil prices in decades.
A sign of weak demand in the copper market
Perhaps the most significant sign of demand evaporation in the copper market is the latest data on inventories.
In COMEX warehouses, copper stocks rose from 27,404 metric tons on March 18 to 40,443 last week, a rise of 47.6%. The increase in copper inventories is a sign of the decline in demand for the red metal.
Expect the unexpected in the current environment. Dislocations are likely to be the norm rather than the exception over the coming weeks and months.