Study: New projects need a $3.50 copper price

The price of copper in New York moved sideways on Wednesday with May futures trading on the Comex market exchanging hands for $2.72 a pound after after economic data from China disappointed the market.

While China's overall economic expansion of 7% – the second-worst quarterly growth since 2000 – was anticipated, the property sector continued to deteriorate. Residential property sales fell 9% compared to 2014 while inventories of unsold residential property rose a whopping 24%. The country's property sector accounts for almost 60% of its copper demand.

Copper is down 12% compared to a year ago, but recovered from five-and-half-year lows struck in January on expectations of a move into oversupply and sluggish demand.

A new study from Thomson Reuters GFMS predicts a surplus this year of just under 400,000 tonnes, at the high end of analysts estimates, and an average copper price for 2015 of $5,975 – today's ruling price.

"We do not expect a pick-up in prices of note until the latter half of 2015," GFMS said in its Copper Survey 2015 according to Platts News:

"Wild cards remain and include supply-side surprises, with producers perhaps cutting back from planned targets, while China's state stockpiler could be active again in the current year."

The copper industry has a long history of these supply-side surprises.

Typical disruptions associated with adverse weather (top producer Chile has swung from severe drought to worst floods in 80 years in 2015), technical problems, power shortages or labour activity coupled with falling grades and dirty concentrates at old mines make forecasting a tough proposition.

GFMS is forecasting copper mine production to increase by over 3% this year to close to 19 million tonnes noting that a 11% decline in industry average cash costs last year means that mine closures are not likely.

"The 90th percentile, measured at $4,763/mt [$2.16 per pound], still gives the industry some space for further price decline," according to GFMS.

The weak price makes it difficult for miners to raise development finance and GFMS estimates the incentive price for new production at just over $7,700 ($3.50 a pound) – a level last seen March 2013.

This will lead to project deferrals, commissioning delays, mothballing and downsizing of mine plans  which may push the market back into deficit further out.