NEW YORK/LONDON (Reuters) - A slump in copper prices to their lowest in five years has pushed as much as a tenth of the world’s miners into the red, but the market may not yet feel enough pain to trigger deep production cuts this time round.
Prices on the London Metal Exchange pierced below $6,000 per tonne on Monday for the first time since October 2009, as the metal slid along with a relentless decline in oil prices and concerns about a growing metal surplus. Copper’s 16 percent decline since July is the biggest since 2013.
In oil markets, the 60 percent slide from last summer’s highs is already prompting many producers to slash drilling plans for this year. Yet most copper miners are still $1,000 away from any serious curbs on capital spending.
The pain would be more acute and unsustainable at $5,000 per tonne, according to Robert Edwards, managing consultant for mining costs at consultancy CRU. At that point, a quarter of the world’s producers would be bleeding cash and Edwards said he would expect “tangible” cutbacks.
Right now, only about 10 percent of the world’s producers, known as the 90th percentile, are in the red. The 90th percentile is often used as a marker of support for commodities markets.
To be sure, some incremental projects have already been affected. Antofagasta will shutter its small Michilla operation in Chile this year because it has become uneconomic.
Last month, Barrick Gold Corp warned it will suspend its Lumwana copper mine in Zambia if the government goes ahead with its plan to raise the royalty rate on open-pit mining operations to 20 percent from 6 percent.
But a prolonged low price will force producers to take a knife to production plans.
“If, as we expect, copper prices remain under pressure in coming months, other producers at the upper end of the cost curve may opt to follow suit,” said Bruce Allway, analyst at GFMS, owned by Thomson Reuters.
In the second quarter, he has pegged the 90th percentile including depreciation at $5,660 per tonne, meaning a price lower than that will put 10 percent of world output underwater.
Prices are seen as vulnerable ahead of the Chinese Lunar New Year in February, a time when demand traditionally dries up as manufacturing levels slow for the week-long holiday.
While the slide began in July, the pace has quickened since the start of the new year. For some, this has kindled memories of 2008. Then, prices briefly sank below $3,000 per tonne as demand for wire and tubing used in construction and the automotive sector sank at the height of the global economic crisis.
It’s too early to dial up comparisons with 2008, Edwards said. Back then, he said, miners shelved projects and closed some costly operations, but the response was slow and limited and producers were reluctant to cut output even as they lost cash.
By the end of 2009, prices had more than doubled, reaching $7,500 per tonne in December as China’s strategic reserve scooped up copper at what it considered bargain prices.
This time, prices have declined at a slower and steadier pace. They are down almost 20 percent since July on concerns about tightening credit and slower demand in China.
Macquarie base metals analyst Vivienne Lloyd believes the market is near its “nadir” and may be poised for a recovery as the surplus shrinks on falling output. Miners have already slashed budgets on developing new projects over the past two years.
Still, miners in Zambia and Chile and China, some of the world’s highest-cost producers, are particularly vulnerable to further downside, analysts said.
In Chile, the world’s No. 1 producer, miners have struggled for years with depleting ore grades at aging mines, leaving them more exposed to the weak benchmark price.
“No doubt a number of those miners at the high end of the curve are feeling the pressure, with some in Zambia among the hardest hit,” said Allway.
Additional reporting by Harpreet Bhal in London; Editing by David Gregorio