Miners Bet on Falling Copper Prices

Miners have started to protect themselves against a fall in the price of copper as the metal’s rally, which only a few months ago looked unstoppable, has hit a wall.

Chiquicamata Coppermine, Atacama Desert, Chile
Charles Bowman | Robert Harding World Imagery | Getty Images
Chiquicamata Coppermine, Atacama Desert, Chile

There is growing nervousness in the copper market as investors begin to doubt the strength of demand from China. The price of the metal, a crucial element in the global economy that is found in almost every building and electrical circuit, has slipped 8 percent since it hit a record high of $10,190 a tonne in February.

Mining companies have been hedging a portion of their copper production since the start of the year, several senior bankers said.

Miners cut back on hedging in recent years – and several gold miners spent billions of dollars buying back their hedges – after protests from shareholders who preferred full exposure to booming commodity markets.

In addition to copper, producers had been hedging silver and aluminum, said traders.

“For a while, hedging had become unfashionable. This has changed,” said François Combes, head of commodities trading at Société Générale. “You have to go back at least five years to find the last time there was genuine hedging of this scale.”

The jitters in the copper market will cast a pall over the annual gathering of the copper industry in Chile, which begins on Monday. Just six months ago, the atmosphere of bullishness was overwhelming when leading metals traders and miners met for the London Metal Exchange week.

Since then, confidence has been knocked by shocks including the Japanese earthquakeand the jump in oil prices.

Copper traders have also grown increasingly concerned about China, the world’s top consumer, where restrictions on credit have crimped demand.

“There’s no question that Chinese consumption has slowed and we are seeing a build-up of stocks in many of the warehouses in the region,” said one senior metals banker. “The copper market is getting a bit tired at the moment.”

The price of copper is critical to the profits of some of the world’s largest mining companies, including Freeport-McMoRan, BHP Billiton , Xstrata and Anglo American , as well as the Chilean government, which owns Codelco, the world’s largest copper miner.

Bankers said the hedging in the past quarter had not had a large impact on copper prices because, rather than selling futures, the miners had been using options strategies to guarantee they would sell their metal within a certain price range.

The miners typically hedged about one-quarter of their expected production to allow themselves exposure to further rises in the price.