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On Thursday, July 21, US copper producer Freeport-McMoRan said that while it was positive on the long-term outlook for copper, it was realistic that near-term concerns about the global economy, higher interest rates and currency exchange rates were creating an uncertain environment and had led to a sharp decline in copper prices.
This, it warned, could lead the company to “adjust its operating plans” accordingly.
The comments are very reminiscent of 2015, the last time copper producers embarked on a market-driven series of production curtailments, closures, asset sales, axing jobs and trimming expenditure.
Back then, copper prices had fallen to six-year lows of below $5,000 per tonne due to oversupply, weak investor sentiment and fading Chinese demand. By the end of 2015, almost one million tonnes of copper had been taken out of the market by producers around the world.
Freeport announced cuts across its operations, while Asarco, a subsidiary of Grupo México SAB de CV, shuttered its Hayden concentrator in Arizona and slowed production at its Ray mine.
The biggest cuts were made by Glencore, which cut 400,000 tonnes of cathode production at its majority-owned subsidiaries Katanga Mining and Mopani Copper Mines, based in the Democratic Republic of Congo and Zambia respectively.
No one wants to pull the trigger on cuts, which have long-term impacts. It’s why, as Freeport chief executive officer Richard Adkerson told shareholders on its second-quarter earnings call earlier on Thursday, it is important to be prudent when making decisions about curtailing capacity, balancing the longer-term consequences with the need to meet current market realities.
One difference between 2015 and now, however, is the price of copper.
In 2015, it was widely agreed that it would take a sub-$5,500-per-tonne copper price before the market started to see any significant reduction in existing or planned production.
Once the market got there, the copper curtailments and project defferals began.
But the cost environment in 2015 was far less inflationary than it is today. This means that even with copper prices above $7,000 per tonne, some operations are getting closer to unprofitable territory.
The costs of power and diesel have escalated upward so rapidly that curtailing capacity on that basis alone would be a relatively obvious decision to make, as aluminium producers have discovered of late.
Another key difference between now and 2015 is the underlying structure of the copper market. Copper began 2015 with around 200,000 tonnes in LME warehouses and ended the year at around 235,000 tonnes; there are now around 135,000 tonnes in LME-approved facilities.
There is little new copper supply slated to come on-stream in the coming years, despite the race to secure the metal for electric vehicles and renewable energy as part of the global push to decarbonize.
According to consultancy Wood Mackenzie, a copper price of $4.25 per lb is needed to incentivize the new supply necessary for the energy transition. That’s around $9,369 per tonne, a long way from current levels and up from the consultancy’s estimate of $3.30 per lb a year ago – a good indication of the inflationary pressures currently in play.
While copper producers aren’t reporting slowing demand from customers in China, recent gross domestic product growth in that country slowed to 0.4% in the second quarter as it continues to pursue a zero-Covid policy.
Although this has naturally raised alarm bells in copper circles, there is little stock available to meet any growth in consumption or any disruption to existing supply.
Efforts to deal with lower copper prices may also lead to the deferral of capital investments, pushing the project pipeline out even further.
The market is pricing in a future recession, but a recovery could also be on the cards.
If that happens, “watch out,” Freeport’s Adkerson said.
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