Join our community of smart investors

Copper's rise has legs

Lower grades are likely to keep copper supply in deficit for the remainder of this year.
February 17, 2012

Last week, three-month copper contracts hit £5,537 a tonne on the London Metal Exchange (LME) - the high point since prices collapsed in the early part of September. Prices have subsequently pulled back as Athens teeters on the brink, but copper's vigorous recovery, reported low stockpiles in China and tight supply suggest recent strength could be maintained. It should also support the likes of Rio Tinto, which this week announced a huge investment in the Escondida mine in Chile.

IC TIP: Buy at 3735p

Central to the supply tightness is an overall decline in ore grades; it's an entrenched problem that is taxing mine managers at some of the world's biggest operations. It feeds into higher unit production costs, and shows little sign of abating.

Underlying profits at Rio Tinto’s copper segment shrank by a quarter on last year's figures due to declining grades at its Kennecott Utah, Escondida and Grasberg sites, while rival BHP Billiton reported that lower grades from its share in Escondida mine had effectively left a $487m (£306m) hole in interim base metals earnings. The two companies are shelling out around $4bn between them to fund technical upgrades at Escondida, to access higher grade ore within the site. But it will be several years before the companies get a return on the outlay.

Grade problems aside, last week's copper price hit the heights after Beijing announced a series of measures designed to stimulate growth in China's private sector. The Communist Party is keen to create an additional 45m jobs in the economy and a successful stimulus on this scale would invariably drive demand for industrial metals such as copper. The received wisdom is that China, because of its peculiar status as a 'part-command' economy, is able to strategically rebuild its stockpiles of base metals as and when prices move in its favour; a situation aided by a prolonged slump in the US construction sector.