TORONTO -- Copper's plunge is leaving the world's largest mining companies with nowhere left to hide from the commodities slump and is increasing pressure on them to cut spending and dividends.
Copper fell as much as 8.7 percent Wednesday in London, triggering a selloff in mining equities including BHP Billiton Ltd., Glencore Plc and Rio Tinto Plc. The metal is down 12 percent on the London Metal Exchange this year amid concern about a slowdown in China, the biggest consumer of metals.
After holding up in recent years, the metal has finally succumbed to some of the same pressures that have dragged down oil, coal and iron ore. The leading miners, some of whom survived a short-term price slump six years ago by raising more capital, are sticking with their diversified model: Producing a variety of different commodities in the hope all of them won't drop at the same time. That may not work.
"Diversification in mining is fake diversification," Dan Rohr, an analyst at Morningstar Inc. in Chicago, said. "Most industrial metals are ultimately tied to the same source of demand growth, and that's China."
Conditions for the industry are so bad that they'll probably get to a point where they're not that different from the downturn following the 2008 financial crisis, Rohr said.
Back then, several of the largest miners had to raise funds to stay in business. Commodity prices bounced back as Chinese growth remained intact.
This time looks different. Wednesday's copper plunge came after the World Bank cut its forecast for 2015 global growth and said China is experiencing a "managed slowdown."
"This is panic around global growth, which resulted in investors dumping the commodity space because it's the most leveraged to the global growth," said Paul Gait, an analyst at Sanford C. Bernstein Ltd. in London.
The current environment makes it "impossible" for mining companies to approve new capital investment, Gait said. Dividends are likely to be cut back, said Rohr at Morningstar and Jorge Beristain, an analyst at Deutsche Bank AG.
Copper's plight is particularly striking because until this year it had been relatively untouched by macroeconomic headwinds. While it fell 14 percent in 2015, crude collapsed 42 percent and iron ore was down 51 percent.
"Copper had been the safety island within a sea of declining commodity prices and now even the safety island is getting flooded," Beristain said. "It's scary, where do you go? There's not a palm tree left to climb up."
Oil and iron ore are among commodities that are seeing a wall of new supply coming on line, spurred by previous high prices.
That's true to some extent for copper as well. About 1.6 million tons of additional mine supply may come online in 2015, Bloomberg Intelligence said last month.
Still, rising usage means global production is expected to exceed demand this year by just 221,000 tons, equal to about 1 percent of overall supply, according to Gayle Berry, an analyst at Jefferies Bache Ltd. The 2014 surplus was 59,000 tons, Jefferies says.
At Baar, Switzerland-based Glencore, copper accounted for about 45 percent of earnings before interest and tax, according to Richard Knights, an analyst at Liberum Capital Ltd. in London. A $350-a-metric-ton drop in the copper price results in a $350 million reduction in sales for the company, a group of Numis Securities Ltd. analysts said.
Information for this story was contributed by Matt Craze, Jesse Riseborough, and Firat Kayakiran of Bloomberg News.
SundayMonday Business on 01/18/2015