Copper fell out of bed!

Copper suddenly fell out of bed yesterday morning!

The red metal dropped to its lowest in 5 or 6 years. As Bloomberg reports current 3 months copper at about USD 5500 a ton, i took a look at the impact of a stumbling copper in DRC financial ecosystem.

What happened?

While every analyst goes about its interpretation, the general view collected here and there points out two culprits: Energy prices and…you’ve guessed it: China.

Firstly, copper prices have been stumbling for the past couple of months but some analysts believe the drastic lows of this past week or so followed energy prices (mainly oil) as industrials fear a more global commodities crisis.

Secondly the World Bank recently reduced its world economic growth outlook led by worse-than-expected economic data from China thus creating fear of demand weaknesses for the red metal.

And DRC in all of that?

The Oil price impact    

At first sight, the fall in energy prices appears to be rather good for copper dependent DR Congo as it drives operating cost down; that is provided local authorities actually action their lengthy price revision process. 

Key targets are transport costs since copper is mainly sent out by road to southern and eastern Africa major ports, and own fuel consumption as the country’s power shortages lead to massive use of fuel for generators. This is in line with the IMF’s view that the current energy nosedive will bolster economic activity.

How that assertion will play out is a factor of two key elements: demand should hardly be affected and mining companies will have to reorganize parts of their costs structures.

The key impact in DRC will obviously be felt in Copper rich Katanga whose mining industry I personally like to divide in Top, Middle and Small income or junior companies.

I usually put my thresholds north of 40.000 tons a year for top producers, then follow a narrow 10.000 to 40.000 tons a year threshold for middle players. Below that are junior companies still settling their technological and production know-how and/or looking for substantial partnerships (off-take or capital) to ramp up.

Cost management is key

Now the impact all depends on where you situate yourself. Top players usually have their fixed costs squared down at about USD 2000/2500 per ton LME. This goes up to USD 4000/4500 for the middle level companies and anything higher than that for the smaller boys.

Furthermore, most of the top and middle players manage to hedge their future supply for a minimum of 3 months, thus making them relatively secured against sudden shock waves.

With an operational cost providing a little more than USD 1000 per ton in buffer, minimum, at current copper prices and an hedged production providing assurances of positive flows for the next quarter or so, most major copper producers in DRC still have breathing room to hope for a potential commodity price recovery. There's therefore little to worry about at this point, unless on has bet on a junior miner, some of whom might have started suffering this very moment. 

However, since only after sight is perfect science, let's see what the next couple of weeks have in store for copper as no one could have precisely guessed, a couple of months ago, that copper would have suddenly fallen out of bed!