Copper market tips supply shock from Glencore mine closures
Analysts say Glencore mine closures in move to cut spending may trigger recovery in the base metal's price from year-long rout
As copper miners start to cut spending and shutter mines because of the plunge in the price of the metal, experts who analyse the market in the base metal are suddenly getting a little more cheery.
They are seeing the potential for a rerun of 2003 when Chile's Codelco, the world's top copper producer stockpiled 200,000 tonnes of the metal that is used in everything from pipes to cars, providing the market with a supply shock that soon drove copper prices back up.
This time around hopes are pinned on the announcement earlier this month from Glencore of a sweeping strategy to shore up cash and cut spending, including plans to shutter two major, high-cost copper mines in Zambia and the Democratic Republic of Congo over the next 18 months. That will cut company output by 400,000 tonnes and remove about 2 per cent of global supply from the market.
For Glencore chief executive Ivan Glasenberg, the plan helped placate shareholders worried about US$30 billion of debt as prices of its main products from copper to coal sank to six-year lows amid worries about China's waning appetite for such commodities.
The company's shares rose 7 per cent on the news, although they have since come under renewed pressure, hitting fresh record lows last week. They are down 60 per cent so far this year.
For the beleaguered copper market, it was the first meaningful supply-side shock since the start of the current year-long rout. It had the potential to help trigger a long, slow revival in prices, analysts and other experts said.
There was a big similarity with the market in 2002-03, much more than the financial crisis-driven plunge in 2008, said Leon Westgate, an analyst at ICBC Standard Bank.
Twelve years ago, prices were languishing near 14-year lows and global inventory was soaring. In response, state-run Codelco built the stockpile of 200,000 tonnes of copper cathodes. It kept that material off the market until conditions had improved.
But the comparisons with 2003 only go so far.
China devoured a record 9.4 million tonnes of copper last year, almost half of the global total, against 3 million tonnes in 2003. The country's average annual growth rate in demand of more than 10 per cent over the past decade has plunged to 3 per cent to 4 per cent this year, and that has been a big reason for the recent price slump.
The copper market was arguably in a weaker state in 2003 than it is now. Global inventories of 1.5 million tonnes were three times higher than current levels, and at US$1,300 per tonne, prices were about a quarter of current levels.
Glencore may find it tougher to implement its plan, which threatens jobs in Zambia and the Democratic Republic of Congo, than government-owned Codelco. But the events of 12 years ago could show how a major supply shock may be just what is needed to stem losses, eventually helping prices to recover.
Citi analyst David Wilson cautions against taking cues from macro events when producers like Glencore are showing they can respond aggressively to weak prices.
"There has been a clear dislocation in the recognition of reduced output growth versus copper prices, but for how long can this continue?" he asked.
Combined with mine outages and China's emergence as a major buyer as its economy took off, Codelco's move in 2003 rescued the copper market from a prolonged downturn.
By 2005, prices had more than doubled to over US$3,000 per tonne, global inventories had plunged to just 100,000 tonnes and the market was in the early throes of a boom that saw prices near US$10,000 per tonne in 2010.
This time, few analysts expect prices to recover by that magnitude, and there are few signs of a significant rebound in Chinese demand, but Glencore's shutdown was expected to tip the market into a small supply deficit next year, Westgate said.
ICBC and Citibank reckon an annualised 1.5 million tonnes have already been lost this year due to power outages, strikes, floods and drought, as well as lower grade source material from producers in various places, from Zambia to Chile.
Fresh cuts and stabilising demand could propel prices towards US$5,700 per tonne in the fourth quarter, Wilson said. That would be an increase of 8 per cent from current levels of US$5,270 per tonne, which are down from about US$7,000 per tonne a year ago.
