May Meltdown: Can Copper Fall to Its January Lows?

A Deeper Dive into May 2016 Copper Industry Indicators

(Continued from Prior Part)

Copper prices

Copper prices resumed their downside in May after remaining relatively strong in April. So far in May, the LME (London Metal Exchange) three-month copper contract has fallen ~8.5%. The May mayhem has negatively affected other industrial metals (DBC) as well. Aluminum and zinc have fallen 7% and 5.6%, respectively, this month. Benchmark iron ore prices have also fallen almost 15% due to a fall in Chinese steel prices. However, thanks to the trade duties, steel prices in the United States have actually increased in May.

The graph above shows the recent movement in copper prices. With the recent downward price action, copper prices are getting near their January lows. Currently, the LME three-month copper contract is only about 7% above its January lows on a closing price basis.

Earnings sensitivity

Note that copper producers’ earnings are sensitive to copper prices. Falling copper prices would negatively impact copper miners such as Turquoise Hill Resources (TRQ), Southern Copper (SCCO), and Teck Resources (TCK). For instance, according to Freeport-McMoRan (FCX), its EBITDA (earnings before interest, taxes, depreciation, and amortization) falls by $425 million for every $0.10 per pound decline in copper prices.

Now the question is, can copper drift to its January lows or will it actually bounce back from these levels? To answer this question, we’ll have to look at some of the recent copper industry indicators. We’ll start by looking at Chinese copper demand indicators in the next part of this series.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Could June Bring Relief to Freeport-McMoRan after May Mayhem?

• Part 3 - Chinese Copper Demand Indicators: Not That Worrisome So Far

• Part 4 - US Copper Demand: Looking Decent So Far This Year