Copper Catastrophe

posted in: Copper | 20,899

Copper futures dropped as low as $2.42 yesterday evening before rebounding roughly 5%:

Copper_5-minute

One of the world’s largest copper producers, Freeport McMoran (FCX), has been hit especially hard (-11%) this morning after copper’s overnight tumble:

FCX

A slide from a recent FCX investor presentation is particularly telling:

FCX_Ebitda

Just 2 months they were only contemplating copper prices at or above $3/lb, at $2.50/lb or lower FCX’s profit profile takes on a much different look:

FCX_Sensitivities

This week’s copper drop alone looks to cost FCX over $1 billion in annual EBITDA.

Meanwhile, the situation in the copper market has reached an extreme with producers actually moving to a NET LONG position for the first time in many years:

Copper_5-year_CoT

Producers are net short 99% of the time given that they generally use the futures markets to hedge their future production. A producer net long position is something that should cause market participants to stand up and take notice. However, if history is any guide the current copper catastrophe may not find a bottom until price reaches the 200-month moving average:

Copper_200-month

The 2008-2009 Global Financial Crisis copper crash ended right at the rising 200-month moving average. The $2.20/lb price level ($4,850/tonne) also roughly equates to the 75th percentile of cash costs which might be low enough that it could put a significant enough squeeze on producers to trigger a large supply response:

Copper_Costs

Read also: Copper price slump may not yet be deep enough to cut much output