Base Metals Lead Commodity Plunge
Alvexo | Nov 23, 2015 10:46AM ET
Copper fell briefly below $2.00 with most metals mirroring the move of a price drop in another stunning admission that the global economy continues to contract. Nickel tumbled by 5.70% and zinc dropped by 4.30% as different commodity classes from energy to agriculture imitated the move lower. Year-to-date, copper prices have fallen 23.00%, dipping 11.00% in November alone amid slumping trade, while crude oil declined -2.70% last week alone. Weak demand combined with rising supply and the strengthening US dollar prove to be the source of sustained downside in commodity prices, crushing investor sentiment. The price slump has largely impacted share prices of the largest miners. Glencore (L:GLEN), under pressure from bond markets already shut underperforming copper mining operations and shelved further investment in moves echoed by Russian giant MMC along with Freeport-McMoran (N:FCX), which also announced further production cuts, hoping to ease the global supply surplus. Chile’s Codelco, which accounts for approximately one-third of global copper production, has chosen to remain a part of the problem, proclaiming that it would rather restrain its costs than cut output.
China, the world’s largest raw commodity consumer, announced on Friday that smelters which produce more than 40% of the world’s zinc are in advance planning stages to cut production in the year ahead. Refined output is planned to be cut by 500,000 metric tons, bolstered in large part by more stringent controls over any new capacity introductions. The Chinese economy has been dramatically impacted by the sinking price of copper with many companies using the commodity as collateral for their loans. More concerning is the re-hypothecation of this copper, meaning the same inventories were pledged as collateral for multiple loans. This could easily spark a surge in nonperforming loans amongst Chinese banks and financial institutions should copper prices continue to dive. Some analysts predict that the fall of copper is a temporary phenomenon due to various factors. For example, the prices for raw materials, which are priced in dollars, are currently looking less attractive as the Federal Reserve prepares for a rate hike in December. Controversy appears meanwhile with the European and Japanese Central Banks contemplating monetary easing, making the dollar based commodity increasingly costly.
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