Copper Production, Price Point in Opposite Directions

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Since late June, copper prices have been trending upward, from a low of around $3.00 a pound to around $3.30 on Tuesday. Production is estimated to be 167,000 metric tons (tonnes) above demand this year, rising to 408,000 tonnes of excess production next year. That makes virtually certain a drop in price with the only question remaining how large the decline will be.

That doesn’t mean that the world’s largest copper producers are in immediate danger. Even with the production increase, Rio Tinto plc (NYSE: RIO) and BHP Billiton Ltd. (NYSE: BHP) currently receive about 50% more for their copper production than they spend to mine it according to Macquarie. Freeport McMoRan Copper & Gold Inc. (NYSE: FCX) gets nearly 80% of its annual revenue from copper and its shares are down more than 15% in the past 12 months.

Rio’s shares are up about 9% in the past year and BHP’s are down about 6%. Neither depends on copper to the same extent that Freeport does.

Chile’s state-owned copper miner Codelco posted first half earnings today that are 28% below last year’s earnings. The miner also said that costs rose nearly 17% year-over-year and that prices fell by nearly 7%.

The price decline is, of course, down to China, which takes about 40% of global copper production. Chinese investment in the country’s power grid was nearly five times higher in the first six months of this year that the country’s planners had targeted for all of 2013. That level of spending is not expected to continue.

A better-than-expected report on China’s PMI for August has given the red metal a bit of boost today, with futures trading up 2.3%. The report was the first in four months to show a positive reading, but August may have been the anomaly, not the prior three months when PMI was stuck in the no-growth zone.

The lightly-traded iPath DJ-UBS Copper Total Return Sub-index ETN (NYSEMKT: JJC) is up 2.2% at $40.58 and the even more lightly-traded United States Copper fund (NYSEMKT: CPER) is up 1.9%, on 12 times average volume of just 1,300 shares traded daily. The Global X Copper Miners ETF (NYSEMKT: COPX) is up 2.5% at $9.30, down about 33% since the beginning of the year. The commodity funds are down about 12% to 13% for the year to date.

Turning down production does not appear to be option. Expansion projects are already in progress and cannot be stopped. Miners are also getting higher yields per ton of ore than they did last year. The outlook is not a happy one.

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