Base metal prices began to claw their way back Tuesday from a steep drop the day before, but the correction continues to wreak havoc on the sector, knocking billions off the value of mining stocks, as investors worry a cooling China and troubled Europe could tip the global economy back into recession.
"I don't think it has even started yet," Charles Oliver, senior portfolio manager at Sprott Asset Management, said of the recent commodities selloff.
"The probability of a recession, or double dip ... is starting to look like a potential reality."
Copper, considered a bellwether metal for its widespread use in construction materials, has fallen about 20 per cent over the past month, followed by price dips in aluminum, nickel, lead, tin and zinc.
Although copper on Tuesday regained about half the value that it lost the day before - climbing 3 per cent to settle at $3.03 (U.S.) a pound on the Comex in New York- it's still well off the $3.60 mark reached just over a month ago.
Copper is expected to strengthen later this year, as China continues its strong consumption of the metal, even as it slows to high-single-digit growth from 12 per cent in the first quarter.
"While Chinese demand growth is set to slow, we believe this is being overplayed, and we are seeing the first tangible signs of a recovery in U.S. and other developed world demand over the past two months," Macquarie Bank Ltd. said in a research note.
The base metal price drops have been hard to stomach for some investors who have been enjoying the runup in prices coming out of the recession.
Consider coal, copper and zinc company Teck Resources which has pulled back from the brink in the past 18 months after an ill-timed deal for Fording Canadian Coal Trust in mid-2008, just before the global market meltdown.
Teck has made a remarkable comeback in the past year, but its stock has fallen almost 30 per cent since mid-April. On Tuesday, it closed up just over 1 per cent to $33.53 (Canadian) on the Toronto Stock Exchange, after falling more than 6 per cent Monday. It hit a 52-week high of just under $47 in early April. Still it's far higher than the $3.35 it changed hands for at the height of the credit crunch in March, 2009.
Falling copper prices have also been a drag on copper companies Quadra Mining and FNX Mining both of which have fallen 15 per cent in the past two days, on the eve of a shareholder vote Wednesday to approve their merger announced in March.
While gold prices continue their reign at about $1,200 (U.S.) an ounce, base metal stocks are expected to remain volatile. To some investors, that looks more like a buying opportunity.
"Base metal equity valuations could have further to fall, and we have learned from experience that catching a falling knife is painful," TD Newcrest analyst Greg Barnes said in a note Tuesday. "But over the longer term, the current selloff is providing some interesting entry points to high-quality base metal producers with strong growth profiles and robust balance sheets."
Base metal prices may have fallen, but they are still trading at lucrative levels for mining companies, said Bank of Nova Scotia economist and commodity market specialist Patricia Mohr.
"Although there has been a big pullback, the level of the prices were really a bit overdone about a month ago. You are pulling back to something a bit more reasonable, but still profitable."