Copper Prices Down as Global Event Crisis and Demand future Month

Copper prices in ending March and first April 2011 down as global events such as Japan's crisis renewed concerns about demand in the next few months.

Copper for May delivery fell 7.25 cents to settle at $4.274 a pound. The price has fallen nearly 5 percent since March 1.

Investors question whether copper demand will soften with Japan's recovery from the earthquake and tsunami, Europe's ongoing financial problems and rising oil prices, CPM Group analyst Carlos Sanchez said.

Copper is used in manufacturing a variety of consumer products, from construction materials to electronics and some auto parts.

Thousands of factories in Japan were idled by tsunami damage and power disruptions after the devastating earthquake earlier this month. That has left shortages of auto parts and technology components.

Meanwhile, Portugal's borrowing rates continued to rise, which could weaken market confidence in the region's ability to resolve the crisis. Europe already has arranged multi-billion dollar bailouts for Greece and Ireland.

There also are concerns that oil prices above $100 a barrel may cause consumers and businesses to cut back consumption, Sanchez said.

June palladium rose $5.15 to settle at $758.10 an ounce and July platinum gained $30 to settle at $1,774.10 an ounce. May gold added $7.60 to settle at $1,423.80 an ounce and silver gained 52.4 cents to $37.511 an ounce.

In other trading, oil prices slipped after the Energy Department said U.S. crude supplies rose more than expected last week.

Crude supplies increased 2.9 million barrels to 355.7 million barrels, which is 0.4 percent above year-ago levels, the Energy Information Administration said.

Analysts expected an increase of 2.2 million barrels, according to Platts, the energy information arm of McGraw-Hill Cos.

Benchmark crude for May delivery lost 52 cents to settle at $104.27 per barrel on the New York Mercantile Exchange.

In April Nymex contracts, heating oil fell 0.39 cent to settle at $3.0534 per gallon and gasoline rose 1.37 cents to $3.0573 per gallon. Natural gas for May delivery added 9.2 cents to settle at $4.355 per 1,000 cubic feet.

Wheat, corn and soybeans were mixed ahead of a government forecast due Thursday on what crops farmers will plant this year.

In May contracts, wheat prices fell 10 cents to settle at $7.2725 a bushel, corn lost 8.5 cents to $6.6325 a bushel and soybeans rose 10.5 cents to $13.72 a bushel.

Kazakh copper miner Kazakhmys on a underlying basis, profits were up an even more impressive 147%.

So what was behind this? Revenues and profits were boosted by strong demand from China, where the company sells half its production. It forecasts a positive long-term outlook with copper prices supported by fundamental demand and constrained supply.

With other voices casting doubt on the true underlying Chinese demand, though, it could be a case of "what goes up must come down".

The core of the company's operations is a fully integrated copper mining and smelting business in Kazakhstan, with 15 mines throughout the country and two smelters. It is the largest copper producer in Kazakhstan and is in the top ten producers worldwide. Gold, silver and zinc are produced as by-products.

The company also owns 50% of the largest coal fired power station in Kazakhstan, with about 20% of its output exported to Russia (EUREX: OMXR.EX - news) , and has an embryonic petroleum division with exploration rights near the Caspian Sea.

It has a 26% interest in Eurasian Natural Resources Corp , a diversified natural resources company also largely based in Kazakhstan, but with wider international scope and ambitions. ENRC's ?12bn market cap adds substantially to Kazakhmys' ?7.6bn value and contributed a third of profits.

The strong results were based on revenues up a third to $3.2bn, matching 2008. Recovery in demand boosted prices, with copper 46% higher than the previous year.

Volumes of copper production were down 7%, which contributed to a rise in unit production costs of 24%. At 89c/lb this compares favourably with Antofagasta (Xetra: 867578 - news) 's 104c/lb. But the company, which held down salary costs, warned that cost pressures increased over the course of the year.

The net effect was that in 2010 each pound of copper cost 89 cents to produce and yielded a 252 cents cash profit, against a 156 cents cash profit on 2009's 72 cents production cost. That's a lot of leverage on the price of copper.

Profit attributable to shareholders nearly trebled and investors were rewarded with a 144% increase in dividend per share, covered twelve times.

Stronger cash flow funded a 55% increase in capex, with both maintenance and expansionary spending scaled up. Even so, net debt halved to $350m and gearing was a negligible 8.6%.

Kazakhmys has 2.7bn Kt of proved and probable copper reserves, of which around one third is located in operating mines. It has two major growth projects, which are expected to start production in 2014 and 2015.

Subsoil reserves are legally the property of the state, and the company operates under licences running to various dates up to 2062. But with the government owning a 26% shareholding and with representation on the board, the company's position should be secure.

Kazakhmys expects copper output for 2011 to be similar to 2010's, with annual contracts already signed for 90% of production. It also sees the long-term outlook as positive.

It compares copper consumption per capita in the BRIC (Chicago Options: ^RBRCUSD - news) countries of between 1 kg (India) and 5 kg (Russia) with 6kg for US, 9Kg for Japan (NYSE: MCO - news) and 17Kg for Germany.

With GDP per capita of the BRIC countries around a fifth of developed nations, there is scope for substantial growth. At the same time, average mine life, and the grade of copper produced, have been in steep decline.

So perhaps it is not surprising that copper prices are at an all time high. But there is another angle. For some time, the Financial Times' Alphaville blog has been running a story about the extent to which Chinese demand for copper is artificially inflated by its use as a financing tool.

Research by Standard Bank suggests that companies with no real use for the metal, such as property developers, purchase it on deferred terms and then use it as collateral to borrow at cheap rates -- or to get loans they otherwise couldn't.

Anecdotally, around 40% of China's net imports of refined copper is sitting in bonded warehouses. Standard Bank describes how falling Chinese property prices could have a devastating outcome for the copper market, causing prices to plummet.

Kazakhmys' ties with China are strong. China takes half its production, it has drawn $700m of a $2.7bn financing line from the China Development Bank, and it is contemplating a secondary listing in Hong Kong. Of the copper miners, it would perhaps be hit hardest by a Chinese meltdown.

A mining company with substantial resources is a safer play than the underlying commodity, and exposure to copper miners makes sense in most portfolios. But I would be wary of timing in buying into the sector.