Copper Tumbles, Eurozone on the Brink of Financial Contagion

By Leia Toovey- Exclusive to Copper Investing News

Copper tumbled to a two-week low Thursday, as the mounting debt crisis in Europe sparked renewed fears of a potential default, sending investors fleeing from the riskier assets.  Borrowing costs for Italy, Europe’s third-largest economy, are threatening to be a new source of possible regional financial contagion. Debt levels in the country are nearing unsustainable levels and the Eurozone does not have enough cash to bail out the struggling country.

Copper futures for December delivery dropped 2.9 percent to $3.342 a pound at 10:28 a.m. on the COMEX. Earlier, the price reached $3.318, the lowest since October 24.On the LME, copper for three-month delivery fell 3 percent to $7,399.25 a tonne. Copper inventories continued to fall and were down 2,125 tonnes, at 410,025 tonnes, according to the most recent data.  The ongoing strike at Freeport McMoran Copper and Gold’s (NYSE:FCX) Grasberg mine is part of the reason inventories are sliding.

Copper was also under pressure by deteriorating growth prospects in Europe and Asia. The European Union cut its GDP forecast for next year from 1.5 percent to just 0.5 percent, as the region struggles to contain its debt crisis. Also, a slew of numbers released out of China point toward a slowdown in the world’s top copper consumer. While the country reported strong consumer spending and investment in assets such as roads and other infrastructure, the data suggests that China’s factories are taking a hit. Data, released Thursday, showed the country’s copper imports rose for the fifth straight month in October, but a fall in iron ore shipments highlighted the risks for raw materials linked to real estate.

The one bright-spot in the global economy was the US. On Thursday, the country’s jobs report showed the number of Americans filing applications for unemployment benefits fell to the lowest in seven months. Unfortunately, pared with the crisis in Europe, the optimistic data was actually negative for copper, as it caused the greenback to rise to a one-month high relative the euro.  A stronger dollar makes metals more expensive for holders of other currencies.

Company news

Workers at Freeport-McMoRan Copper & Gold Inc.’s Grasberg mine in Indonesia rejected the company’s most recent offer for a 35 percent pay raise, pushing the labour dispute into its third month. About 8,000 workers at Grasberg, the world’s largest copper mine, are demanding wages that are more in line with what workers around the globe are earning, as well as better working conditions. The strike is now one of the longest labour disputes in the country’s history. Freeport McMoran said in a statement last Tuesday said that they may miss their sales target in the fourth quarter due to the ongoing labor strike at the Grasberg mine in Indonesia. Freeport is also dealing with continued wage problems at its Cerro Verde mine in Peru, where a regional government has given striking workers five days to end a six-week-old conflict before calling on the central government for resolution.

Europe’s second largest copper producer, KGHM, posted record third-quarter earnings as a declining zloty and high metal prices boosted the company’s bottom line. KGHM’s third-quarter net profit jumped three-fold, climbing to 3.20 billion zlotys ($989 million), and surpassing analysts’ average expectations of 2.74 billion zlotys. The company has already raised its 2011 earnings targets once this year, and now, according to Chief Executive Herbert Wirth there is a likelihood that they will be revised up, again. Also, KGHM will make a decision on an acquisition target by the end of November, according to the Chief Financial Officer. At a news conference, Maciej Tybura announced “In November there will be a decision in relation to the large acquisition, whether we’ll buy or not. Rumour has it that the target is Canadian junior Candente Copper Corp (TSX:DNT).

Anglo American Plc. (LSE:AAL) made a bold, aggressive move to block Codelco from acquiring 49 percent of its Chilean copper unit by selling a stake to Mitsubishi Corp.  The move cuts in half the holding state-owned Codelco is able to buy in Anglo American Sur SA. Mitsubushi Corp., Japan’s largest trading company spent $5.39 billion and is now a 24.5 percent shareholder. Codelco planned to borrow $6.75 billion from Mitsui & Co. to help pay for the 49 percent stake, it said October 12.

Securities Disclosure: I, Leia Toovey,  hold no equity interests in any company mentioned in this article.