London - A glut of metal and sagging demand growth in top consumer China could come back to haunt copper bulls, who are feeling more confident with prices rising back above $5 000 a ton from the 6-1/2 year lows hit last month.
Behind the recovery is a focus on weather-related disruptions in countries including Chile and Zambia, thought to have taken out 1.2-1.5 million tons of capacity this year, significant in a market estimated at 22 million tons.
That combined with production cuts at operations owned by London-listed mining giant Glencore and US-based Freeport have persuaded some analysts to cut their forecasts of the surplus to near zero for this year.
But many still expect a hefty surpluses this year. Bank of America Merrill Lynch analyst Michael Widmer expects a surplus of 569 000 tons.
“Output cuts, from Glencore and Freeport in particular, reduce possible supply in 2016 even before it starts. It's worrying that these cuts and a 1.3 million ton disruption allowance still leave me with a surplus of around 280 000 tons next year,” Widmer said.
“We will only get more output cuts if prices fall to around $4 500, producers need to be incentivised to cut, for the market to rebalance,” Widmer said.
Glencore plans to suspend 400 000 tonnes of copper output in Africa over the next 18 months, while Freeport has said its 2016 copper sales would be about 3 percent lower than previously estimated at 5.25 billion pounds.
Benchmark copper on the London Metal Exchange (LME) tumbled to $4 855 on August 24, its lowest since July 2009 and a drop of 25 percent from the 2015 high of $6 481 hit in May.
Poor demand prospects provide sustenance for the bears. Matthew Wonnacott, a senior consultant at CRU, expects global demand growth to slow to 1.1 percent this year from 3.5 percent last year, while for China the figures are 2.5 percent and 7.2 percent respectively.
Goldman Sachs expects flat copper demand growth in China this year. It forecasts copper prices at $4 800 by the end of this year and $4 500 by the end of 2016.
“We see the risks to these forecasts as skewed to the downside ... a lack of demand and potentially a lack of conviction in a pick-up in demand is resulting in high cost producers shutting capacity, or upgrading existing facilities in order to reduce costs,” the US bank said.
Also worth noting are copper stocks in warehouses approved by the LME and those monitored by the Shanghai Futures Exchange, up more than 180 000 tons at 470 000 tons in total. But total stocks including those held by producers and consumers are likely to be much higher.
On the other side of the fence are consumers, many of which are being encouraged to hedge at current levels. But Premvir Jain, head of metals at risk management firm Openlink, thinks that would be premature.
“Production cuts announced are not substantial enough to help set a floor for prices,” Jain said. “We expect prices to fall to around $4 800, if not lower, that's the level where we recommend consumers start hedging.”Reuters