Commodities Corner: Copper pounding

Copper took centre stage among commodities last week with a sharp fall which capped off a miserable three months.

From the all-time high of $US10,700 a tonne (and more than $US5.039 a pound) in March after the Russian invasion of Ukraine, copper slid in May and June dropping below $US8,000 a tonne for the first time in almost 18 months on Friday.

But Friday saw bad news from Chile for the industry where plans for new, higher taxes on major miners were revealed. By some estimations, the tax on some companies will jump 32%.

The tax means some of the world’s biggest miners will be hit – from state-owned Codelco to BHP, Rio Tinto, Anglo American Glencore and Antofagasta.

A press release from the Chilean treasury said there are two parts to the tax – one is an ad valorem tax between 1% and 2% for companies that produce between 50,000 and 200,000 tonnes of fine copper a year and a rate between 1% and 4% for those that produce more than 200,000 tonnes (BHP is in prime position for the tax – it has Escondida, the world’s biggest mine as well as two other mines in Chile).

The other part of the tax is a rate between 2% and 32% on profits for copper prices between $US2 and $US5 a pound. Both components vary based on the price of copper.

Smaller copper producers will continue with the current tax system.

That saw shares of major copper producers came under renewed selling on Friday in offshore markets. BHP securities trading in New York lost 3.6%, Rio Tinto lost 3.3%, Vale shares dropped 1.9% and Glencore shares lost 4.2% in London

Despite further signs of an improvement in the health of the Chinese economy, the world’s major consumer of copper, the fall in the metal’s price has been relentless.

Friday saw London Metal Exchange benchmark copper drop 2.6% to close at $US8,047 a tonne, for its fourth consecutive weekly decline. The metal touched an 18-month low of $US7,955 a tonne in trading.

Copper had its worst quarter since 2011 in the three months ended June, falling 20.4%. LME copper was down 4.3% for the week.

Comex copper ended at $US3.62 a pound for a loss of more than 3% for the week. It hit a low of $3.55 a pound on Friday in New York

Other industrial metals also fell, with zinc dropping 9% last week.

But there are some positives – global stocks remain tight, production from some mines in Australia are down because of wet weather and labour shortages and copper output in Chile, the world’s largest producer of the metal, fell 2.7% year-on-year to 480,275 tonnes in May.

Other metals continued the gloomy note, with nickel down 3% and aluminium off 2% despite the improvement in Chinese manufacturing and service sector activity which both moved back into expansion after months of contraction.

“This suggests the market views the improvement as not enough to offset the potential slowdown in developed economies,” strategists at ANZ said in a report.

Friday saw more bad news for economies and commodities: Euro zone inflation hit another record high in June of 8.6% (its 9% in the UK).

US inflation (on a Personal Consumption Expenditure basis, which is favoured by the Fed) rose 6.3% on a headline basis in May from May last year. On a core basis it was up 4.7%. Both measures were a touch easier than in earlier months – the headline rate was 6.6% in March, but that was cold comfort for investors.

While the figures on Thursday and Friday showed a rebound in China, data on Friday showed activity at factories from the US to the euro zone, slowed to levels last seen in the initial wave of the pandemic more than two years ago.

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Despite stronger data from China about the rebound in manufacturing especially, iron ore ended the week off the pace (though not as weak as copper or zinc).

On the Singapore Exchange, the steelmaking ingredient’s front-month August contract was down around 4% at $US114.15 a tonne for 62% Fe fines delivered to northern China, slightly higher than the previous Friday’s $US113.15. Friday’s close, though, was down sharply from the week’s high of $US123.61 a tonne on Tuesday.

“It’s not just China where steel output is under pressure,” said Warren Patterson, head of commodities strategy at ING. “Expectations of slowing economic growth, and the growing risk of recession, are clearly not great for global steel demand.”

Comex gold prices settled down 0.6% for the week at $US1,801 an ounce after dropping to $US1,798.90 in trading. But after-hours trading saw the price jump sharply to nearly $US1,813.

Oil prices gained more than 2% on Friday as supply outages in Libya and expected shutdowns in Norway (because of industrial action) outweighed expectations that an economic slowdown might dent demand – a belief supported by that weak data from the US and Europe about the health of manufacturing.

But the activity in China bounced back well in June, offsetting worries about demand from the world’s biggest importer.

Brent crude futures settled at $US111.63 a barrel, rising $US2.60, or 2.4%. West Texas Intermediate crude (WTI) settled at $US108.43 a barrel, gaining $US2.67, or 2.5%.

For the week, Brent lost 1.3%, while WTI rose 0.8%. For June, both benchmarks had ended the month lower for the first time since November.

The US oil rig count, rose by just one to 595 last week, still its highest since March 2020, according to the weekly report from energy services firm Baker Hughes.

The number of gas rigs fell four to 153, the biggest fall since August.

That saw the total number of rigs fall to 750 from 753 the week before because of the fall in gas rig numbers.

On Thursday, the OPEC+ group of producers, including Russia, agreed to stick to its output strategy after two days of meetings. However, the producer club avoided discussing policy from September onwards.

OPEC+ had previously decided to increase output each month by 648,000 barrels per day (bpd) in July and August, up from a previous plan to add 432,000 bpd per month.

A Reuters survey found that OPEC pumped 28.52 million bpd in June, 100,000 bpd lower from May’s revised total.