Fitch Ratings: Copper Price May Be More Resilient Than Oil

- Despite the dramatic fall in prices earlier this week, copper is unlikely to see the same extended decline as oil and iron ore, Fitch Ratings says.

Current prices of around 5,600 dollars per tonne still provide reasonable margins for Fitch's rated portfolio, which are medium and large companies often operating several mines. But higher cost, unrated miners could cease to be profitable if prices fall to around 4,500 dollars per tonne.

The sharp decline in copper has been driven by macro concerns about the global economy, slowing growth rates in China, speculative activity in China and expectations of a shift in the market balance to surpluses in 2015 and beyond. The strengthening dollar, which is generally negative for all commodities priced in dollars, has also probably been a factor.

"But while Chinese growth is slowing, we still expect GDP to increase by 6.8 percent in 2015 and this growth is on a significantly larger base than at the start of the decade" Fitch Ratings said.

Monthly economic indicators on Chinese copper imports were not showing any material slowdown, while a drop in physical purchases in the last few days might have contributed to the price decline, according to Fitch analysis.

"But this is normal in the run up to Chinese New Year as commodity traders prefer not to hold large stocks during the holiday period, when industrial activity slows sharply" Fitch said.

On the supply side, delays to the development of new copper mines mean that the market surplus was likely to be less than previously expected, said in the analysis, reminding that previous market forecasts of a physical market surplus of several hundred thousand tonnes in 2015 seen excessive and the surplus was likely to be between 100,000 and 150,000 tonnes.

"This is small enough to be wiped out by a delay in a major project or by strikes in South America" Fitch said.

"If copper does fall to 4,500 dollars per tonne or below then higher-cost producers such as KAZ Minerals would be most exposed. A fall on that scale could also lead other companies that are part way through large capex programmes, such as First Quantum, to reconsider the timing of these programmes" the analysis added.

(GRAPH)