BIG TROUBLE FOR COPPER: The Breakdown Of The Industry Has Begun

The king of base metals is in big trouble as indicators point to a breakdown of the global copper industry.  This goes well beyond the typical “slowdown” or “downturn” in the copper market.  Instead, we are going to witness what I refer to as “Copper Industry Carnage.”

While some readers may feel as if I am being a bit “doom and gloomy” here, the situation in the global copper industry is much worse than most analysts realize.  This is due to the fact that many analysts are forecasting copper supply deficits in the next few years, which would push the price of copper higher.

Unfortunately, this sort of industry analysis is well behind the curve or even worse, guilty of wishful thinking.  The world economy is slowing down… and this will likely pick up speed by the end of the year.  Which means, demand for copper will continue to weaken, pushing prices even lower.

Today, the price of copper is down 2%, impacting the copper miners.  Freeport’s stock price was hammered lower by over 7% today in market trading.

Low copper prices are already causing damage in the top two copper mining companies in the world.  The second largest copper producer, Freeport-McMoran, suffered an adjusted income loss of $214 million in the first half of 2016.  Part of the loss was due to their lousy shale oil and gas investments.

For some stupid reason, many base metal mining companies jumped into the oil and gas business with both feet when the shale energy bonanza took off in the United States.  For example, BHP Billiton reported a hefty $7.2 billion impairment (write off) on its onshore shale oil and gas assets last year (for their year ending Q2 2016).

While that may seem like one hell of a lot of money for BHP Billiton to write-off on its shale oil and gas assets, Freeport-McMoRan did one even better.  According to FreePort-McMoRan’s annual report, they reported a staggering $13 billion impairment on their oil and gas properties in 2015 on top of another $3.7 billion write off in 2014.

As they say… easy come, easy go.

So, not only are the big base metal miners suffering from low base metal prices, they are also enjoying a wonderful shale oil and gas enema from the other end.  I don’t mean to be harsh here, but who on earth was in charge of making these lousy shale energy investment decisions for these base metal mining companies??

And it gets even worse.  I just read this jewel of an article yesterday on the Financial Times, BHP Billiton Bets Long On U.S. Shale Assets:

Five years after BHP Billiton plunged $20bn into the US shale revolution, the wait goes on for shareholders.

Even if oil prices rally by one-third the fields will not generate significant free cash flow until the turn of the decade, the mining company cum oil producer revealed at investor briefings last week.

….. BHP’s acquisition of two US shale producers in 2011 was followed by $17bn of investment, beefing up an oil business that has long set the world’s most valuable mining company apart from its peers. About one-third of BHP’s group earnings before interest, tax, depreciation and amortisation have come from petroleum over the past five years.

The timing of its shale bet proved ill-judged. Following a savage market downturn that has seen oil prices more than halve, BHP has racked up $12bn of impairments and the US shale business is now valued at just $12.6bn. Output is expected to fall by a quarter this year, the consequence of a much reduced drilling programme.

So, the Einsteins at BHP Billiton acquired U.S. shale oil and gas assets that are now only worth $12.6 billion, after they racked up $12 billion of impairment losses since 2011.  Furthermore, even if the oil price increases by one-third, they won’t generate any significant free cash flow until 2020.

Warning to BHP Billiton shareholders….. GET OUT WHILE YOU CAN.

I tell ya, it is amazing to see supposedly savvy businessmen in high-dollar suits making these sort of insane investment decisions.

Okay, let’s get back to the destruction of the copper mining industry.

The First Sign of the Gutting Of The Copper Mining Industry

The first sign of the gutting of the copper mining industry is taking place as Chile’s mining truck purchases collapse.   This is bad news as Chile is the largest copper producer in the world.  Chile produced 5.7 million tons of copper in 2015, way ahead of the second ranked country, China, that mined 1.6 million tons.

According to a report by the Chilean Copper Commission, new mining truck sales fell to a low of 40 units in 2015, down from a peak of 392 in 2012.  As you can see, this is not a slowdown.  Rather, truck purchases have fallen off a cliff:

chile-copper-industry-new-mining-truck-imports

We have to go all the way back to 2004 to see a unit number that low.  Even with the huge downturn in the global markets in 2009, Chile still imported 122 new mining trucks that year… more than triple the figure for 2015.

Why is this such a big deal?  I took the total number of new trucks imported (purchased) by Chile and compared it to the annual average price of copper:

chile-copper-industry-new-trucks-vs-copper-price

There seems to be a correlation between the copper price and new truck purchases by the Chilean Copper Industry.  When the price of copper fell to $1.34 a pound in 2009, Chile still imported three times more new mining trucks that year than in 2015, when the copper price was double ($2.70).   Sadly, Chile’s new mining truck purchases are down 90% from their peak in 2012.

Of course, there were new projects coming online to justify some of the large number of truck purchases in 2011 and 2012.  However, Chile’s copper production has only increased from 5.4 million tons in 2010 to 5.7 million tons in 2015.  Would a 5% increase in Chile’s total copper production justify the need for 322 new trucks in 2011 and 392 new units in 2012??

Regardless, demand for new mining trucks in Chile has fallen 90% from its peak.just a few years ago  I would imagine new truck sales in 2016 will likely be even weaker.  This is not a good sign for the largest copper producer in the world.

The Top Copper Mining Companies Are Getting Hammered

As I mentioned in the beginning of the article, Freeport-McMoRan suffered a $214 million adjusted income loss in the first half of 2016.  That’s pretty bad because “adjusted” income removes many items (such as impairments) from the bottom line to arrive at figure that represents a more realistic day-to-day cost of mining copper.

For example, Freeport also suffered an additional $4 billion impairment on its shale oil and gas assets in the first half of 2016.  So, if we add that to the $13 billion of shale asset impairments last year, Freeport has racked up a cool $17 billion in shale asset write-downs in just a year and a half.

Maybe it would have been a good idea for the management at Freeport to stick with mining copper, rather than blowing big money on the U.S. Shale Oil & Gas Black Hole.

If we look at Freeport-McMoran’s free cash flow for the past eight years, something is dreadfully wrong now.  For a quick refresher, free cash flow comes from deducting CAPEX (capital expenditures) from their cash from operations:

freeport-mcmoran-free-cash-flow

Here we can see that 2010 and 2011 were good years for Freeport as they enjoyed $4.8 and $4 billion respectively in positive free cash flow.  However, this took a turn for the worse in 2014 as free cash flow turned negative to the tune of $1.5 billion, then doubled in 2015 to a negative of $3.1 billion.

Even though some of that negative free cash flow can be blamed on losses from their  shale oil and gas assets (liabilities… haha), the majority of Freeport’s revenues are from copper and metal mining.  For example, of the $15.8 billion in Freeport’s net revenues in 2015, only $1.9 billion was from U.S. shale oil and gas proceeds.

While the change in Freeport’s balance sheet to negative free cash flow in the past two years is not a good sign, the situation is even worse when we add in their dividends.  From 2013-2015, Freeport paid out nearly $5 billion in dividends.  Thus, they forked out $8.8 billion more during the past three years than the cash they made from operations.

Now, if we look at the largest copper producing company in the world, their results aren’t any better.  In the first quarter of 2016, Chile’s Codelco mining company reported a $125 million net income loss.  This loss is purely on producing copper as Codelco doesn’t have any U.S. shale oil or gas assets.

According to Codelco’s financial highlights on their website, they enjoyed a $7.4 billion pre-tax profit in 2012, $3.8 billion in 2013 and $3 billion in 2014.  However, things turned south in 2015 as they suffered a $1.4 billion pre-tax loss that year.

Coledco produced 1.9 million tons of copper in 2015, while Freeport came in second at 1.5 million tons.  So, the two top mining companies that produced 3.4 million tons of copper in 2015… didn’t really make any money.  And it looks like 2016 will be even less fun for these large copper miners

The global copper mining industry is getting ready to face some serious hard times.  Again, the falling copper price and the financial trouble taking place in the world’s top copper producers is not the typical market correction awaiting a turnaround in the global economy.  Rather the copper industry is heading towards a disintegration to a much smaller size.

Unfortunately, investors and analysts who  continue to believe the situation will recover in the global economy, will lose a lot of fiat money holding onto these copper and base metal mining companies.  Even though investors should have realized something was wrong when several base metal mining companies moved into the U.S. Shale Oil & Gas Ponzi, and lost a lot of money, they will continue to hold onto these stocks as we enter into the next phase… the Copper Industry Carnage.

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50 Comments on "BIG TROUBLE FOR COPPER: The Breakdown Of The Industry Has Begun"

  1. “I tell ya, it is amazing to see supposedly savvy businessmen in high-dollar suits making these sort of insane investment decisions.”

    nothing amazing about it at all. during a major economic downturn the boss came down and told the savvy businessmen, “get me profits, I don’t care how, just get me profits or you’re fired”. the savvy businessmen looked around, saw the hype surrounding shale oil, knew it was too risky, but invested in it anyway because 1) there was nowhere else to go, and 2) they wanted to prolong their jobs.

    simple.

    same thing is happening right now in retirement fund trusts everywhere ….

    “Warning to BHP Billiton shareholders….. GET OUT WHILE YOU CAN.”

    they can’t. there is nowhere else to go.

    • DisappearingCulture | October 13, 2016 at 3:56 pm | Reply

      “they can’t. there is nowhere else to go.”

      got to be some distressed corporate bond out there paying 7% lol

    • SoSo…. true gmam !! I could not have said it better. We have given these people at the top too much credit in the past. They are not street savvy to Washington’s demagoguery.

    • I’m no analyst, but I recognized the shale oil and gas “miracle” for a sham, and know for a fact that many in the industry likewise knew it was a fraud. Thanks to commentators like SRSRocco, truth is reaching the broad market audience to the point where there can not be anyone with a proverbial ear to the ground who still buys the big lies.

      I sincerely hope that I can attend some of the trials and sentencing for these executives, board members, bankers and bookkeepers. Justice needs to be done and seen widely to be done.

      • “I recognized the shale oil and gas ‘miracle’ for a sham”

        everybody did. nobody cared, because there was nowhere else to go. it’s like a millionaire trying to buy his way onto a lifeboat. he throws his money at the deckhand and hopes to get on. if he gets on, hey, great. if he doesn’t get on then he hasn’t lost any money that he wasn’t going to lose anyway. that’s how it works.

        “I sincerely hope that I can attend some of the trials and sentencing for these executives, board members, bankers and bookkeepers.”

        wrong people. they’re caught up in all this just like you and me. the responsible parties are the owners of the federal reserve fiat debt dollar.

  2. Ray says:
    Has anyone heard this talk going around about investing in white oil. I have no clue but the scuttle butt is you can run a car engine for 150-200 miles on just a few ounces. I think this is crap like so many other things we hear. Anyone out there knows leave a comment. If anyone knows it would be Steve that runs this site.

  3. Dr Copper to dr Steel; how come they can’t manage affordibility?

    Dr Steel: it’s because you’re too weak.

  4. My question is – how much will this affect the copper/gold miners and what is a point of ratio where the company should be avoided for a while?

    • Gold, silver and copper are often found together. I betcha that the miners will be focusing on gold and siver in the short term.

  5. Im no doctor but I treat Copper the same way as Silver.I have physical Copper coins,bars and rounds.I believe Copper will play a big roll if we ever make it to a sound money system.I also expect Gold and Silver shortages when paper fails and would much rather barter with Copper,than Gold or Silver.

    • then you should look into nickles. they’re the only legitimate coins left in circulation.

      • A million bucks in US five-cent pieces is enough to crush any residential floor that is not reenforced concete. 500,000 rolls. Maybe, they have a place in a heat-retaining wall, or as big-safe ballast? I got about $200 nickels in an M-60 ammo can, then bought a 10oz silver bar. Much nicer.

  6. Excellent analysis as usual. This is actually another expected acceleration point. As copper mining falls off a cliff, so goes a significant portion of silver supply. It’s counter intuitive to most folks, but as the economy turns down, silver price rises – and this is just one reason (albeit a big one). Thanks Steve.

  7. Would China government Keynesian infrastructure construction stimulate the copper price go up ?

    • GFW-Chinese,

      I doubt it because the rapidly Falling EROI won’t allow the Chinese to continue the same insanity of city building to nowhere for another decade. Of course, they could extend things a bit, but I believe global debt is now becoming unsustainable.

      The Chinese are in big trouble. They will never become the next great power, even though I believe they deserve to have their time.

      steve

      • Thank you, Steve.
        I found that some of China markets are hot again, e.g. Coal price, Iron ore & steel price, cooking coal, etc.

      • Watch this: http://finance.sina.com.cn/futures/quotes/JM0.shtml
        It’s China coking coal bull market. Price up up mad ….

      • It’s like the developing world, China, India, South East Asia etc are turning up to the EROI party when all the beer is just about drunk and everyone’s leaving.

        • Barry,

          You HIT THE NAIL on the head. Louis Arnoux will be discussing the Thermodynamic Oil Collapse with me in an interview this Thursday. We will be going over 6 charts. One of the charts shows the actual wealth creation by various countries. China is but a mere rounding error compared to others.

          I believe you will find the information quite interesting.

          steve

          • I am really looking forward to that interview.

          • I sometimes go to “economic disaster” channels and try to inform people that the reason that the world is becoming awash with debt is not some conspiracy of the elites, which by the way have been ruling for ever, but the falling EROI of energy. And for some reason I get some intense flaming. The reason for which I don’t quite understand. Whether the channel is right or left wing leaning the result is the same. People are intensely against contemplating the science of this dilemma. .

          • “I sometimes go to “economic disaster” channels and try to inform people that the reason that the world is becoming awash with debt is not some conspiracy of the elites, which by the way have been ruling for ever, but the falling EROI of energy. And for some reason I get some intense flaming. The reason for which I don’t quite understand.”

            it’s because you’re wrong. the reason the debt keeps increasing is that is how the fiat debt currency system is designed to operate. it first rewards, then enforces, debt accumulation. discharge of debt is impossible without total economic collapse. its end-state is all collateral seized and all participants bound up in non-dischargeable debt – feudalism. eroi has nothing to do with it – if cold fusion were revealed and implemented tomorrow and we all had nearly free energy for the rest of the millennium, fiat debt currency would suck up this as well and we’d still be left with nothing in the end. “if ever the american people allow the banks ….”

          • To Gman
            EROI reached a needed 30 to 1 in the early 70s the same time Nixon acted.
            https://srsroccoreport.com/wp-content/uploads/2016/08/U.S.-Public-Debt-vs-U.S.-OIl-Gas-EROI.png
            The so called elites were ruling in the 50s and 60s, life was good because there was a lot of energy to go around.
            Rome was always ruled by “elites” yet it’s currency wasn’t corrupted until it ran out of energy.
            If cold fusion was invented the standard of living might not go up for parts of the American right because their true subconscious hate is secularism but for the rest of the world it would. And yes the “elites” would still rule because they always have and they always will. Except when a strong man takes over like Hitler or Napoleon and we know how well that turns out. The aim is to use democracy to keep the “elites” under control. China is communist which is supposed to be averse to the power of elites. Who runs China? The elites. In nature survival is a battle for resources, water and energy. That’s it. That is all life is.

    • They’re close to the end of that game.

  8. Thanks Steve, good work, appreciated.

  9. Going beyond the dismal general economic implications, I’m curious how slowing copper mining will effect the supply of PM byproduct production. Steve- any thoughts?

    • Xploregon,

      By-product silver production from Base Metal Mining will fall like a rock. It has to. While 20% of gold production is a by-product of base metal and silver production, 70% of silver is a by-product of base metal and gold production. So, we can see that silver supply will be hit the hardest when the SENECA CLIFF starts in earnest.

      I will be interviewing Louis Arnoux this week on Thursday. I believe you will find the information quite interesting.

      steve

  10. Is ww3 around the corner to, cover up the mess? and would that end with the lose of available energy/oil to continue the fighting? Or the radiation? Didnt hitler have a similar problem with the former?

  11. Steve you’re getting good at hiding the veggies in the other food for the kids. 🙂

  12. I work freeport in Indonesia I’m from Canada and you wouldn’t know they rising money they are going like crazy here

  13. Many canaries in coal mines are dying now. Not only real world stuff like truck sales is disastrous, luxury condos in Manhattan and elsewhere, luxury car sales in China, etc etc etc also. The US oil industry will be an important ingredient in the witches’ brew cauldron of the coming crisis.

  14. To: r sinclair
    Your right about Hitler and you can throw the Japanese into that category. They did not have enough energy to continue to fight, among other problems. Hitler was to greedy like most dictators. Attacking the Soviet Union was just one mistake of many. Hitler also should have waited till his jet fighter was on line and he wasn’t to far from the atomic bomb being ready. He should have waited a few years and he might have succeeded because we were isolationist and stayed out of other nations business as a whole. Hitler was really doomed when the Soviets entered the war. I am happy that he did not wait. I wish I could speak German but not forced too.

    We on the underhand had plenty of oil and the capability to fire up our factories to confront whoever.
    I probably went on more then necessary, but yes, you can’t win a war without energy.

  15. THIS is how I believe the banksters complete their global takeover.

    Every significant company is deliberately sabotaged financially as well as hammered down in the next crisis… the bankers come in with freely (fraudulently) printed currency and buy out the bulk of the shares at dirt cheap prices… they may then choose to allow a few schmucks like us to remain “shareholders” purely for image, or they may force a complete buyout of the remaining small percentage. I believe they have done this to may companies already, they are just in the final cleanup stage now. Suppressing all commodity prices is a key part of this plan.

    Of particular importance to them is all the infrastructure, resource/mining, utility, telcos, etc – they do/will own everything that we need to exist in modern society.

  16. If you could get it, the number of new mines brought online, and, average truck life span versus time in comparison to copper price might be more revealing.

  17. China likes metal, well .. they need it, we all do, they only recently let the citizens buy ag/au, now they are eating more au for breakfast than India, due to devaluing their currency, they had to throw the commonwealth a bone, so they did.

    Not to ding this article but virtualcapitalist has a headliner today, oil market is bigger than all metal markets combined. Still, I think the money these miners spend is totally dependent on the money they bring in, which also helps them get more credit, practically free money, they’ve bought all the equipment they needed, for now, well they have to depreciate all that stuff, write it off, and with all the latest greatest equipment and metal prices on the wane, world demand, I’m sure peaking up again, at some point you have to sit back and watch/wait for the money to keep rolling in.

    Metal prices are all over the place, well they sort of are, that’s a sign of weird investment demand, allot of money has fallen into precious metals, just in ten years demand for ag coins and bars went from 50 million to 300 million a year. People didn’t forget 2008, or 2011, which I’m cool with, next recession I’ll be mopping up silver on the cheap, might be a few years yet, almost free money is kind of a new game, and negative interest rates will be next, how else will governments going to continue spending, not by raising them! Seriously, I think it’s a contest to see who can get away with ringing up the most debt.

    It’s true Bob, the lower interest rates are just making the rich richer, you look at the Wells Fargo fiasco, and it’s all about money, no .. it’s also about treating people like human beings, instead of just tools, meh, I guess it is all about the money.

    Still Bob, I don’t think commodity prices are all that low, oil is, but everyone wanted to play oil, well they over expanded too, cheap money, big investment, begets cheaper product.

    We are starting to see continual merger activity!, this is definitely precursory to recessions?

    I’m no expert, I like to speculate and think about stuff when my head is clear.

  18. Codelco is a state company, so its sole investor will not go anywhere, unless they decide to privatize it, which tends to happen during such times, below fire sale prices. That may have been one of the reasons for the shale sharade: CEOs and boards may have been ‘encouraged’ to do it by bankers — every such company has a CFO that is has strong bankster links. Not a new sharade, but works most of the time. One such example is privatization of Russian oil industry for bribes and peanuts. Worked like a charm, until the unfavourable regime change.

  19. Steve, China won’t be a rounding error but onef the major factors in another context, the soon-comoing worldwide economic collapse.

  20. Oil, copper, whatever, are going the same way because of weakening demand. Oil will go a lot lower soon bcause of the oversupply.

  21. Yes Reader, the govts and ueber-elites via the central banksters are engineering the collapse so that they can pick up everything on the cheap and introduce the NWO.

  22. PM only one way.–>downwards.Miner stocks(HUI) -30 percent from the top.

  23. What about cannabis stocks?California want to leglize at 11.November.When i look to the PM prices/stocks this is maybe the best anti depressiva?

    • “What about cannabis stocks?”

      anyone can grow it for free, and unlike food there still are quite a few people out there who are experts at growing their own.

  24. Thoughts related to several of the above comments…
    With each metals producing company, the norm is to quantify their output in “gold-equivalent ounces” if the gold they produce has more dollar-value than any other metal, and “silver-equivalent ounces” if silver is the main metal in dollar-value. In each case, the metals other than the primary one, are listed as by-products.

    To gain clarity about the degree of impact a slowing copper industry has on the precious metals, it would be very helpful to create a listing, a chart if you will, of perhaps the top twenty copper producers along with historical production of gold and silver by year, and with shading for the time periods in which copper prices sank from earlier highs. Are the copper producers actually able to focus on different spaces so as to “high-grade” precious metals during times of low copper prices? I think not. However, doing so is a standard and wise business practice for gold miners.

    Is there a direct and never-changing correlation with Codelco’s copper production and it’s by-product silver production? CONTINUED IN PART 2

  25. PART 2

    When we go down the list of copper producers below the top twenty, there are undoubtedly many smaller producers which, whether they are described as a “copper producer” with by-products, or as a silver or gold producer with significant copper by-product, they may be more sensitive to market price changes. Not only is it likely that they are more nimble than the giants, but they NEED to be so, to survive. So in copper down-markets they might need to lower production faster and more severely. I don’t know that it is of benefit for us to know the percent changes in silver production at each individual company, but it would be helpful to determine whether the silver production change is similar OVERALL in smaller companies as with the giants.

    Only then can we rather accurately estimate what the lessened worldwide copper production indicates for silver production.

    Over the years I’ve seen quotes from analysts stating that 55% of silver production is as by-product of base metal mining. Other analysts state 60%, 65%, and 70%. And I’ve never seen an article or report that addresses the ideas I’ve laid out here. If anyone has done substantial research on these ideas, they haven’t been willing to make their findings public.

    Further, it is my belief that silver produced as a by-product of gold mining is likely to not be significantly affected by changes in the gold / silver ratio (GSR)

    Copper and silver can be thought of as “siblings,” here, given their close relationship in both production and industrial demand.

    Tangent to all that…. I find it interesting that China is purportedly interested in using silver in much of it’s heavy electrical needs. If the price of silver increases greatly, copper will be a suitable substitute in some applications. And conversely, industrial silver use puts a floor under the price of silver. As the price of silver gets cheap, the cost of silver wiring, along with it’s lighter weight visavis a more massive copper cable make silver a viable contender.

    Charley Z

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