What Collapsing Copper Prices Could Mean For Rio Tinto plc And BHP Billiton plc

Royston Wild looks at how China has given Rio Tinto plc (LON:RIO) and BHP Billiton plc (LON:BLT) a new headache.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

opencast.mining

Fresh concerns over the copper market’s supply/demand balance, this time due to changing Chinese credit restrictions, has put the earnings outlook of diversified miners including Rio Tinto (LSE: RIO) (NYSE: RIO.US) and BHP Billiton (LSE: BLT) (NYSE: BBL.US) under heavy scrutiny once again.

Copper three-month futures have clattered almost 10% lower in less than a week, falling below $6,380 per tonne in the process to the cheapest level since the summer of 2010.

Chinese credit changes threaten to flood market

Copper’s recent nosedive was prompted by Beijing’s allowance of Chaori Solar to default on a bond payment, the first occasion that the government has refused to bail out a domestic company. Concerns now abound that China is tightening credit rules for manufacturers, as well as the use of materials such as copper for collateral by financiers.  

John Hardy, metals analyst at Saxo Bank, notes that copper’s critical role as collateral for a multitude of lending and credit activities in China could lead to vast quantities of copper now swamping the market, as financial reforms in the country remove the need for large quantities of stored metal.

I suspect copper can fall much lower still as it remains so far above its historic trading ranges,“the analyst notes. “The hundreds of thousands — even millions — of tonnes of copper that have been warehoused in China and elsewhere represent a significant chunk of standard, industrial demand for several months or longer.”

So how do copper’s troubles affect the big two miners?

Both Rio Tinto and BHP Billiton have stepped up project expansions and brought new facilities onstream to benefit from a perceived rise in copper demand in the years ahead. Rio Tinto saw production jump 15% last year to 631,500 tonnes last year, while BHP Billiton witnessed a 6% advance to 843,200 tonnes during July-December.

However, a backdrop of worsening fundamentals for the copper market is weighing heavily on these companies and putting these best-laid — and not to mention capex heavy — plans to the sword.

Rio Tinto saw copper revenues, an area responsible for more than a tenth of group turnover, collapse 11% last year to $5.9m due to collapsing red metal prices. Meanwhile BHP Billiton witnessed copper sales slip 3.5% to $7.1m during the final six months of 2013 — the company derives more than 20% of total revenues from the copper market.

As one would expect, shares in Rio Tinto and BHP Billiton have rattled lower in recent weeks as the state of the global economy has come under the spotlight, having shed 11% and 9% respectively during the period.

And with collapsing copper prices leading to fears that other commodity classes could be in danger of price contagion, I expect that the revenues outlook across the mining sector could come under intensifying pressure in the coming days and weeks.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston does not own shares in any of the companies mentioned in this article.

More on Investing Articles

Investing Articles

BAE Systems shares are flying! Have I missed the boat?

Sumayya Mansoor looks into whether or not BAE Systems shares are still a good buy for her portfolio after the…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

1 heavyweight FTSE 100 share I’d buy as London retakes its crown

Some Footsie firms are extremely large, but that doesn't mean they couldn't get even bigger. Here's one such FTSE 100…

Read more »

Investing Articles

I’d buy 5,127 National Grid shares to generate £250 of monthly passive income

With a dividend yield of 6.5%, Muhammad Cheema takes a look at how National Grid shares can generate a healthy…

Read more »

Investing Articles

The FTSE 100’s newest member looks like a no-brainer to me!

This Fool explains why she sees the newest member of the FTSE 100 as a great opportunity after its recent…

Read more »

Investing Articles

Empty Stocks and Shares ISA? Here’s how I’d start earning a second income from scratch

Like the thought of earning extra cash tax free? Our writer explains what he'd do to begin earning passive income…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

No savings at 25? I’d start by investing £3k in these 3 red-hot FTSE 100 shares

Harvey Jones thinks these three FTSE 100 stocks would be a great way to kickstart a portfolio of UK shares.…

Read more »

Young Black woman using a debit card at an ATM to withdraw money
Investing Articles

Up 35% from this year’s low! Here’s where I think Lloyds shares are headed in H2 of 2024

My Lloyds shares are already doing well this year but that’s not guaranteed to continue. What factors could turn the…

Read more »

Investing Articles

Approaching £5, is there still growth ahead for the Rolls-Royce share price?

The Rolls-Royce share price has been flying in the last year. But is there more growth ahead or should investors…

Read more »