Copper prices at seven year low

Copper is at one at one of its lowest points in a decade. In fact, the commodity is now trading at its lowest level in 7 years, according to London Metal Exchange (LME) data. We would have to go all the way back to December 2008 to see a lower price: US$1.39. After peaking at US$4.60 in 2011, copper prices have been on a steady decline, and finally hit rock bottom a few days ago, when they dipped under the US$2 mark. In other words, copper prices have dropped over 55% so far.

Chinese markets increasingly uneasy over copper prices

The current situation is a result, according to experts, of turbulence in Chinese markets, which has been driving copper producers increasingly nervous since the beginning of the year. China’s economic slowdown is playing a key role in the present situation, as the drop in demand keeps on pushing copper prices further down. But, copper prices are also being dragged down by several other contributing factors, including a stronger dollar, the speculative activity of non-trading agents - who are maintaining short positions with respect to metal prices - and, finally, lower oil prices and, consequentially, lower energy-related production costs and copper selling prices.

The countries most affected by the decline in copper prices are Chile, China, Peru and the United States. Chile is the world’s largest copper producer, and is responsible for almost one third of global copper extractions (31%), followed by China (9%), and Perú and the US (7% each). By consumption volume, the world’s top countries are: China, with 50%, and the US, with 8% and Japan and Germany with 5%.

Chilean government officials are issuing cautionary messages, warning that these levels may last throughout 2016 and 2017.

"We weren’t expecting such a prolonged downward cycle" said Aurora Williams, Chile’s Minister of Mining. "It is worrying, because, yearly, for every cent copper prices drop in average, Chile loses US$128 million exports, and tax authorities collect about US$60 million less,” she added.

Chile: Lower tax collections

According to Secretary of State for Energy, Máximo Pacheco, since 2015 to date Chile’s tax revenues have been bearing the impact of lower copper prices. “The country’s budget for 2016 was drawn up considering a copper price of US$2.5 per pound. As long as China’s economy continues riddled with uncertainty, we will need to get used to this volatility in prices, which does not respond to strict market fundamentals,” Mr. Pacheco said.

In a recent article, Hermann Esteban González of BBVA Research Chile’s research study published in November 2015, estimated that while it will “not result in an increase in pressure to finance this year’s budget that would require to dispose of assets or make significant spending adjustments”, sub-US$2 prices will "indeed lead authorities to max out the US$9 billion bond issue cap authorized by the Congress for deficit-related debt.”

“The reasons why such low copper prices would not translate in increased financing needs for next year are diverse,” explains González. “The compensatory effect of the higher exchange rate that would accompany lower metal prices; that the revenues of Chile’s Copper Corporation, Codelco, estimated by Tax Authorities are close to the floor that the institution is required to transfer according to the Reserved Copper Law, and that the Government requested a bond issuance space equivalent to US$9 billion to fund an estimated US$7.74 billion deficit,” he explains.

“Therefore, the budget is already considering a US$1.26 billion surplus to finance more adverse scenarios,” continued González. But, if the scenario worsens continues to worsen, the government will be forced to, in first instance, adjust public spending before resorting to the use of sovereign funds or requesting authorizations to expand debt issuances.

Copper is Peru’s most valuable export and accounts for almost 22% of the country’s total, or almost US$9 billion. Miguel Palomino, from the Peruvian Institute of Economy, warns that, despite low prices, mining projects remain profitable, and that those already in operation will not be "affected by a large extent." However, “industry projects that have still not been rolled into production could see their commissioning timelines pushed back.”

What is clear, is that producing countries are going to keep a close eye on China’s economic performance and that, at the same time, will have to remain resigned to the levels of market volatility expected for 2016.