Cuts in copper mine output are raising doubts about the extent of a widely expected global surplus that has driven down prices, and the reduced production could support a market rebound.
An expected glut of supply in 2015 is one reason – along with tanking oil prices – why investors have been selling the metal in droves in the past six months, pulling prices to their lowest level in 5-1/2 years.
But several mining companies have cut their expected 2015 copper production, mainly for geological or technical reasons – and only now are new forecasts emerging from analysts downgrading global output this year.
Some have gone so far as to wipe out the surplus altogether and pencil in a deficit.
“The market is not going to be as over-supplied as we had originally thought after several announcements on cutbacks,” said Vivienne Lloyd, base metals analyst at Macquarie. “We expect the market to be quite balanced this year.”
Concerns about economic growth in China, which accounts for 40 percent of global copper consumption, has also weighed on prices for the metal – often seen as a bellwether for economic health because of its use in industries from construction to consumer goods.
However some economists say any pick-up in the Chinese property sector this year could boost demand for copper and further eat into a global surplus.
Analysts polled by Reuters in October had expected the global surplus to shoot up to 350,000 tonnes this year from a forecast 94,300 tonnes in 2014. [MET/POLL]
Since then, Rio Tinto has trimmed expected 2015 output at its Kennecott U.S. operation by about 100,000 tonnes and BHP Billiton has cut around 150,000 tonnes from forecast production at Escondida in Chile, the world’s largest copper mine, said Citi analyst David Wilson. [ID:nL6N0TO1Q0]
Glencore has reduced its forecast for output at its Alumbrera mine in Argentina by 50,000 tonnes, Wilson said in a note.
“We expect the late arrival of the rain season in Zambia and DRC (Democratic Republic of Congo) will have a significantly negative impact on open pit copper mining activity in both regions,” he added.
Analysts are now looking much more critically at the numbers.
Macquarie now predicts supply will outweigh demand in 2015 by 98,000 tonnes, slashing its projection by more than 300,000 tonnes since October following mine output forecast cuts.
This year may see a repeat of 2014 when analysts had to scale back their forecasts of mine supply growth, said Citi’s Wilson.
“Should a similar pull back in projections occur this year, and mine supply growth is limited to around 3 percent, the prospect for the copper market moving into surplus is remote in our view.”
Caroline Bain, senior commodities economist at consultancy Capital Economics has forecast a 2015 deficit of 30,000 tonnes.
“Having followed everybody else (in previous years) with producer projections initially, and then having to revise down, we thought this year we’re going to start by being pessimistic and hopefully it will come right,” she said.
“We have always been quite cautious about how strong supply was going to be this year simply because the record has been so bad over the last few years,” Bain added.
Stronger-than-expected demand in top consumer China could also trim a surplus, said Xiao Fu, head of commodity markets strategy at Bank of China International.
“The key might be in the second half, when we see whether the Chinese property cycle recovers modestly or if it continues to slump. That will be a key determinant in terms of how big the copper surplus will be,” she said.
“Overall, I think that China restocking trends can be quite powerful and many market participants may be under-pricing that scenario.”
Copper tumbled more than 8 percent on Wednesday, pulled down by big falls in oil prices and concern about the global economy after the World Bank cut growth forecasts. [MET/L]
Oil prices have affected copper – another industrial commodity – as some investors believe the rout in crude is signalling weakness in the global economy.
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