COPPER SHOULDN´T FALL DOWN OIL´S WELL / THE WALL STREET JOURNAL

Heard on the Street

Copper Shouldn’t Fall Down Oil’s Well

Red Metal’s Longer-Term Prospects Look Robust

By Helen Thomas And Abheek Bhattacharya

Jan. 14, 2015 10:50 a.m. ET

     A sharp fall in the price of copper Wednesday left the metal at a more than five-year low. Reuters

Another day, another commodity in free fall. But, unlike oil, the meltdown in copper prices looks out of kilter with the metal’s longer-term prospects.

A sharp fall in the price of copper Wednesday left the red metal at a more than five-year low. Even after recovering slightly, copper is down 16% since the middle of last year, when oil started its slide.

Tumbling prices for oil and iron ore have a knock-on effect as investors pull money from commodities in general. Short positions on the U.S. Comex futures market are at record levels, as investors bet on the next resource to swoon. Copper, given its standing as a barometer for economic activity, tends to wilt at any sign of a slowdown, particularly in China’s housing market; a World Bank report that trimmed its growth outlook for China to 7.1% this year provided one spark for the selloff.

Macroeconomic angst could mean further volatility, especially if Chinese economic data surprises in either direction. A seasonally quiet period for copper, as buying slows ahead of Chinese New Year in February, leaves the metal vulnerable to negative sentiment.

But copper still looks more secure than other commodities that have suffered. Despite slowing growth, China’s imports of copper concentrate rose nearly 18% last year, according to data provider CEIC. Inventories have started to rise but not to an extent that indicates a sharp drop in final demand for the metal.

The supply of copper is constrained. Big miners, including Glencore , BHP Billiton and Rio Tinto , have already cut their outlook for copper production for this year. That dents forecasts that have supply of the metal modestly outstripping demand for 2015. The anticipated start-up of new mines this year and next increases the chances of unforeseen disruptions or delays to production.

The idea that oil’s descent has a fundamental impact on the copper market doesn’t really add up.

True, lower oil prices will reduce costs for miners. But energy as a proportion of total costs is lower in copper than for other commodities, according to Macquarie, at 18% compared to 37% in iron ore, 40% in aluminum or 33% for nickel. In any case as costs fall, miners can’t just ramp up copper output: The industry is effectively producing to full capacity and even brownfield expansions would take perhaps two years to bring onstream.

With copper grades falling, meaning more earth must be shoveled to produce the same amount of metal, falling prices could instead make lower-grade mines or projects uneconomic.

Other factors may also help support the price. Trade in scrap metal, which accounts for more than a fifth of the market, is likely to seize up. Chinese buyers, including the State Reserve Bureau, could move in to take advantage of low prices.

Copper can’t avoid getting caught in the commodities downdraft. But compared to other commodities, it looks less likely to languish for long.