Copper: dead red
Production growth of the red metal buoyed (or stopped sharper falls in) shares of the big miners last week. That is a bit odd, given that copper prices are down 30 per cent since their 2011 highs. Rising production is a limited comfort when demand remains slack.
Copper output jumped 23 per cent from a year earlier at Rio Tinto over the quarter as the Oyu Tolgoi mine in Mongolia finally ramped up. At Anglo American output jumped by almost a third. Yet excess supply could reach 800,000 tonnes by the end of next year, according to some estimates, as bigger miners expand projects and China adds capacity. The country is now the world’s second-biggest producer, with annual output growing faster than in Chile. What is more, copper supply disruptions are now at a decade low.
But demand looks to be worsening, too. While China’s economic growth picked up slightly in the third quarter, investment has been falling in the country’s power sector. This drives most of China’s copper demand. Monthly spending growth on power infrastructure in the year to date is a quarter the pace at the start of the year. That suggests that the copper price has not hit bottom yet. Granted, depleting grades, or geographic scarcity, could support the copper price eventually, but that is still a long way off. Goldman Sachs estimates that the copper price could reach $6,200 a tonne within 12 months from $7,200 today.
Investors in the likes of Rio need not worry too much – it still depends on iron ore for most of its pre-tax earnings. But shares in purer-play copper miners such as Freeport-McMoRan and Antofagasta have not fallen as sharply as falling earnings expectations. Both still benefit from the idea that a global economic recovery will boost copper use. But that looks premature. Trading on 11 and 16 times expected earnings respectively, both miners trade at a big (50 and 33 per cent) premium to their three-year averages. This is at odds with reality.
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