Production cuts have had little impact on metals glut
FIRST zinc, then nickel, and now copper. Production cuts by the world’s biggest supplier are failing to prop up beleaguered markets.
Prices have wiped out gains after Chinese smelters banded together in the past two weeks to fight low rates with co-ordinated reductions. The latest effort from copper producers to trim output by 350 000 tons sparked a rally of 1 percent on Tuesday that has since gone into reverse.
For analysts at Morgan Stanley, this reflects doubts over whether individual companies will stick to agreements to restrain supply when prices rise. And it highlights what metals markets are desperate for: a pick-up in demand.
“For a sustainable lift in copper, nickel and zinc prices, these markets actually need a recovery in demand growth,” analysts led by Tom Price said in a note on Wednesday. The most probable source would be “renewed stability” in demand expansion and the economy in China, or an “outright lift” in the developed regions of the US, Europe and Japan.
Metals producers worldwide are gauging their response to prices at multiyear lows amid a slowdown in Chinese consumption and a glut of inventory. China’s zinc smelters announced cuts of 500 000 tons on November 20, also spurring a fleeting rally, while nickel prices plunged 4.6 percent on the day producers vowed to cut output by 20 percent.
Such informal alliances in a fragmented market would be “immediately tested” if prices rose, the Morgan Stanley analysts said. “For if any player breaks rank, all other players will follow, returning prices to their local lows.”
The bank would not include the Chinese reductions in its list of announced cutbacks, because it did not see them as sustainable, the analysts said.
Morgan Stanley’s view echoes that from Goldman Sachs, which says only a recovery in China, the biggest consumer, would be enough to rescue prices. Demand for metals in the country was in the middle of a hard landing as consumption from the construction, car and power industries slowed, analyst Fu Yubin said in Shanghai.
Similar pledges to cut supply from aluminium producers in China had rarely held together, analysts from Standard Chartered said last month, while concentrate freed up by the reduction could be redirected to other smelters.
The London Metal Exchange index of six base metals is heading for a 26 percent decline this year, the worst annual performance since 2008, and prices are at multiyear lows. Copper fell 0.9 percent yesterday, extending a 1.5 percent drop a day earlier and more than erasing a 1 percent gain on Tuesday.
The cuts might at least be a sign that producers in the country were taking the situation more seriously, Helen Lau, an analyst at Argonaut Securities (Asia), said this week. “It’s something new, especially for the producers and China overall in how to manage overall capacity.”
The copper smelters also pledged not to build new refineries and urged the government not to approve new projects.
Producers outside China have taken a mixed view on the cuts. Glencore shut facilities in central Africa to trim supply, while Codelco, the world’s largest producer, said it would not reduce output and would focus instead on paring costs.