Dr. Copper Has Bad News for Mining Stocks – by Isabella Zhong (Barron’s – September 24, 2015)

http://www.barrons.com/

The red metal is down 50% from its peak, but miners may suffer as weak demand weighs on copper prices.

Dr. Copper may need a hospital given the kicking being meted out to the red metal. The widely used base metal suffered another body blow on Wednesday after a gauge of China’s manufacturing activity fell to its lowest point in more than six years, heightening concerns about demand for copper in the world’s biggest consumer of the commodity.

The metal has earned the sobriquet Dr. Copper given its ability to predict the direction of global growth because its use tracks industrial activity. Unfortunately, there is only one conclusion to draw from the good doctor’s charts: prognosis, negative. A near 4% slide in the copper price on Tuesday steered the metal to a 50% decline from its February 2011 high of around $4.60 a pound, and analysts expect more pain to come as waning demand collides with too much supply.

Nomura’s Patrick Jones expects copper prices to fall another 8% from current levels in the next two years, and that casts a pall over major producers like BHP Billiton ( BHP.AU ) ( BLT ) and Rio Tinto ( RIO.AU ) ( RIO ), which are already laboring under near decade low iron ore prices.

Like other beaten down commodities, copper has fallen victim to its own success. Surging prices on the back of voracious demand from China’s then double digit growth spurred mining companies to zealously crank up production. The elevated production, combined with a Chinese economy in its fifth year of decelerating growth, has created a supply glut that is unlikely to clear anytime soon. Copper supply is forecast to run ahead of demand until at least 2019, according to estimates from Nomura.

While producers such as miner-cum-trader Glencore ( GLEN.UK ) have announced plans to scale back production and an 8.3 magnitude earthquake in Chile has disrupted supply at some mines, the cuts will do little to soften the blow from softer demand from China.

Manufacturing continued to weaken in September, with the Caixin purchasing manufacturers’ index recording a preliminary reading of 47, falling from a final reading of 47.3 in August. Nomura’s Jones expects China’s copper demand growth to slow to roughly 3% by 2017 from the 9% pace it averaged over the past five years.

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