Summary: Glencore's recent move to cut production and close mines was the biggest single reduction in global copper supply in 20 years and may build a basis for an eventual recovery the copper price. But large stockpiles, economic adjustments in China and concern about US interest rate policy means uncertainty still permeates the market.
Key take-out: Analysts are now tipping copper oversupply will end next year.
Key beneficiaries: General investors. Category: Commodities.
Dr Copper is off his deathbed!
That sounds melodramatic but what happened last week to copper, a bellwether metal with supply and demand fundamentals often used to predict economic trends, was deeply significant and almost certainly signalled the low point in the overall commodity complex.
Recovery, however, will not be quick because there are big stockpiles of surplus raw materials to be consumed before prices can rise substantially.
And then there are the questions of which way the global economy will move after the US starts to raise interest rates, and how China manages its adjustment to a period of slower growth.
What happens in the US and China are important factors on the demand side of the copper equation, but what’s happening on the supply side is just as important.
Glencore production cuts a turning point
The turning point for copper supply was a decision by the Anglo-Swiss miner, Glencore, to make deep cuts in production thanks to a combination of the low copper price and its own balance sheet distress.
The Glencore move, which includes the closure of two copper mines in Africa, was the biggest single cut to global copper supply in 20 years and follows production cutbacks, or outright closures, at another 17 copper mines around the world.
Over the next 12 to 18 months more than 1.2 million tonnes of copper, equivalent to 7 per cent of supply, will be removed from a market which has been in flood conditions for the past four years.
At the same time as mines are closing, demand for copper, which is used in a wide variety of industries such as construction, transport and electronics, is forecast to continue growing at around 4 per cent a year, well down on the boom year but up nevertheless.
Falling supply and rising demand are the perfect combination for price recovery and a reason why some of the world’s smartest investors, such as US billionaire Carl Icahn, are revisiting the copper market.
Icahn buys up copper producer
Icahn, a famous hunter of distressed assets, surprised the market late last month when he snapped up an 8.5 per cent stake in Freeport McMoRan, the biggest US-based copper producer which includes the giant Grasberg mine in Indonesia as one of its assets (see Have oil and industrial commodities bottomed?, September 2).
Glencore’s cuts are another signal for investors that conditions in the copper market are highly unlikely to worsen from now with the important question being how quickly they recover.
Slowly is the correct answer to the speed of the recovery because closing a mine does not mean supply disappears overnight and in the case of the Katanga and Mopani mines of Glencore the closure process will spread over the next 18 months.
But the African mine closures follow deep cuts announced at other mines, including Ok Tedi in Papua New Guinea, the Ray and Tyrone mines in the US, and the El Abra mine in Chile.
First reaction to last week’s announcement by Glencore came from speculators who rushed to close out short positions in copper.
In China, shorting copper has become a proxy for betting against the country’s economy since short-selling on equities markets was banned by the Chinese Government.
Two other reactions were just as interesting.
Upward trends in copper price
There was the price of copper on the London Metal Exchange (LME) which rose by 6 per cent from around $US2.30 a pound to US$2.44/lb, and the share price of Rio Tinto which added $1 immediately after Glencore’s announcement, and has continued rising.
The recovering iron ore price has also had a big effect on Rio Tinto but copper is the rising star in the company’s diversified portfolio thanks to its heavy investment in the big Oyu Tolgoi mine in Mongolia.
Glencore, which last year proposed a merger with Rio Tinto, has also has benefited from its own copper cutbacks with a modest rise in the price of its shares on the London stock exchange.
Uncertainty about US interest rate policy and Chinese growth is clouding the outlook for copper and other metals but an upward trend in the copper price can be seen on the LME were stockpiles have started to decline.
From a mid-August high of 371,000 tonnes of copper the LME stockpile has fallen by 7.8 per cent to 342,000 tonnes and while sharp movement in the stockpile has been seen a number of times over the past few years the latest decline comes at a time of mine closures rather stockpile shuffling from one warehouse to another.
Analysts ponder an end to the era of copper surpluses
A number of commodity market observers have noted the changing dynamics in the market, including a comment from Macquarie Bank which is forecasting a shift in conditions from an overall surplus of copper to a deficit from next year.
Macquarie believes there are more supply cuts to come, and sees overall copper supply this year remaining in surplus with 115,000 tonnes of metal added to the stockpile.
But, with the mine closures coming into effect next year should see a supply deficit of 248,000 tonnes.
ANZ Bank’s view of the copper market is for a surplus this year of 200,000 tonnes with the mine closures having a significant effect next year.
“As such we feel the bottoming of the copper price has already occurred and would look to prices pushing higher into year end,” ANZ said.
For investors the changes underway in the copper market are a sign that an “up leg” in a conventional supply/demand cycle has started.