While steep declines in copper, iron ore and coking coal prices have spooked investors, they are not severe enough to disrupt the mining sector at this stage.
A wave of unease swept through world markets today as the metal with ‘a PhD in economics’ stoked growing fears about China
The vast majority of projects can generate decent margins at these price levels, according to experts. Though in the case of coal, there has been enough of a drop to make high-cost producers nervous.
Prices for all three commodities have been under pressure throughout 2014, but they plummeted over the last several days due to economic concerns out of China. Manufacturing activity has been weaker than expected, and a bond default by a solar company raised fears of tighter credit conditions. That hit the copper market in particular, as many Chinese companies use the red metal as collateral to raise money.
Chinese steel mills are also being threatened as the government tightens environmental standards. That is putting pressure on coal and iron ore.
Copper has sunk to near a four-year-low, falling below the psychological barrier of US$3.00 a pound. Iron ore dropped to US$104 is a tonne after trading above US$130 for most of last year. And steelmaking coal has fallen to US$110, compared to more than US$150 last fall.
Mining executives said they are not panicking yet. They have seen numerous fluctuations just as dramatic as this one over the last few years. For example, iron ore prices plunged 30% in August of 2012, sinking below US$85 before rebounding. And copper has dropped below US$3 a few times since 2009, bouncing back quickly each time.
Nonetheless, there is some concern in the industry that this copper slump could last a little longer than the prior ones.
“The market is very jittery about risk right now. I think people are going to want to wait and see how this pans out over the next few weeks,” said Derek White,” chief executive of KGHM International Ltd. (formerly Quadra FNX).
He added that at a long-term copper price around US$3, there is no real threat to mining operations. That could change if the price drops below US$2.50 for a prolonged period.
The iron ore market is unique in that prices have defied analyst expectations for the last couple of years, performing much better than anticipated. This week’s drop brings them closer to many forecasts.
Experts said that most iron ore projects are fine at a long-term price above US$100. But the real question is whether US$100 will be the long-term price, rather than the much higher one that mining companies have enjoyed in recent years.
Mark Morabito, executive chairman of Alderon Iron Ore Corp., said his Chinese partner, the giant steelmaker Hebei Iron & Steel Group, believes the average price will fall between US$110 and US$140 for the next several years. If it trades above or below that range, it will not stay there very long.
The market is very jittery about risk right now
“There is short-term volatility. But Hebei has been bang on the money now for 18 months, which is why I don’t read the other sector reports that predict prices anymore,” he said.
Coking coal has been the most volatile of the three commodities, with spot prices soaring above US$300 a tonne in 2011 before dropping dramatically to the current US$110 level. In addition to the China concerns, investors are worried about excess supply, especially from Australia.
Prices are still not low enough to disrupt most operations, but they may cause companies to rethink greenfield projects. TD Securities analyst Greg Barnes said that Teck Resources Ltd. will likely defer its Quintette project in British Columbia until the market recovers.