Dr. Copper Explains Malinvestment-------Supply Still Rising, Marginal Producer Costs Falling, China Demand Shrinking, Prices Heading Further South

by Agnieszka De Sousa and Debarati Roy at Bloomberg

Miners are digging up more copper

 

Miners are digging up more copper

 

The pain rippling through the copper market isn’t yet threatening profits for most miners, and that could mean more tears for bullish investors.

Even with prices near a six-year low, about 90 percent of copper mines are profitable, meaning most producers have little incentive to reduce output, according to Standard Chartered Plc. Prices need to fall another 24 percent before major companies begin cutting back, Bloomberg Intelligence estimates.

“You want miners to throw in the towel, start shutting down some mines,” Kenneth Hoffman, an analyst at Bloomberg Intelligence, said by telephone. “They keep forging ahead with all their plans. They’re still bringing new stuff on.”

As producers dig up more metal, demand for the raw material is weakening with China’s economy expanding at the slowest pace since 1990. Societe Generale SA estimates that copper’s oversupply will almost double this year. Goldman Sachs Group Inc. expects prices to reach $4,800 a metric ton in the next six months, a 9.4 percent drop from Tuesday’s settlement.

There are some signs the mine expansion will slow. Freeport-McMoRan Inc., the biggest publicly listed copper miner, has promised a sweeping operational review, is considering spending cuts and may adjust production, it said in a statement Tuesday.Power restrictions in Zambia could lower output in the second half of the year, TD Securities Inc. and RBC Capital Markets forecast.

‘Bleeding’ Stops

Antofagasta Plc cut its full-year production forecast by 6.3 percent from a February estimate because of delays in starting a new mine, it said Wednesday. The outlook for mining has begun to look shakier, Macquarie Group Ltd. said Wednesday.

The Freeport plan signals “some capacity being taken offline, which should be good news for the copper price,” Christopher LaFemina, an analyst at Jefferies LLC in New York, said by phone. “It stops the bleeding to some extent, at least.”

Supply concerns pushed copper higher by the most in almost three weeks on Tuesday, climbing 2.1 percent to $5,297.50 a ton in London. Citigroup Inc. on Monday reiterated that prices could rally 33 percent to $7,050 in the next 12 months because of disappointing mine production. On Wednesday, the metal erased gains of as much as 1.9 percent to trade 0.2 percent lower at $5,288.50 at 3:23 p.m. in London. Prices are down 16 percent this year.

“We do not see a magic reversal,” Artur Passos, who produces the metals outlook at Itau Unibanco Holding SA, said by telephone. “Supply issues have to be very large to generate any kind of deficit in the global market.”

Output Rising

Mined output will rise 5.3 percent in 2015 to 19.4 million metric tons, according to BMO Capital Markets. Next year, production may increase 8.2 percent, the most since 1996, said Jessica Fung, an analyst at BMO, citing figures from the World Bureau of Metals Statistics.

Stockpiles monitored by the London Metal Exchange are at the highest in more than a year.

Low energy prices and the decline in currencies of producing countries such as Chile against the dollar are making it cheaper to produce the metal. That means companies can still make money, even as prices keep falling.

“They are able to keep mining,” Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees about $126 billion, said by phone. “This is unfortunately turning into being a story like oil, gold. We have more than we need.”

Source: Copper’s Tumble Not Over With Most Miners Still Making Money - Bloomberg Business

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