Copper dives despite supply cuts; demand needed

Production and Markets

Copper production cuts by giant producer Freeport-McMoRan Copper & Gold Inc did not stop prices for the red metal from tumbling to 3-1/2 year lows on Thursday, and prices will not head higher again until frozen credit conditions thaw enough to send demand higher.

On Wednesday, the world's largest publicly traded copper producer announced it would slash output by about 200 Mlb (90,000 t) in 2009 and 500 Mlb (225,000 t) in 2010, mostly at its highest-cost mines in North America, with a small portion coming from South America.

"That's like 1 and 2 percent of global supply. It certainly helps, but I don't think it is enough," said Edward Meir, commodity analyst at MF Global.

Also on Wednesday, Nippon Mining Holdings Inc, Japan's top copper producer, said it was considering curbing copper output by 10 to 20% owing to weak demand, its first deliberate cuts in at least 10 years.

Still, copper prices fell on Wednesday and then on Thursday plunged to a new 3-1/2-year low, well below the psychologically key level of US$1.50 a pound. Meir and other analysts said the slump in metal markets resulted from a rapid and steep decline in demand with suppliers too slow to respond.

"The demand side is off 50 to 60 or 70% in some markets. There are some businesses where no one is buying anything. It's so steep on the demand side that producers are having a lot of trouble keeping up (with cuts)," Meir added.

While no one knows when demand will return for metals, the most optimistic see no improvement until at least second quarter of 2009 based on anecdotal evidence from consumers.

At a presentation this week, Canadian miner Teck Cominco Ltd’s CEO said he looks for a protracted downturn lasting at least 12 to 16 months.

And RBC Capital Markets sent in a note on Wednesday said it does not see a significant, sustained rebound in commodity prices before the second half of 2010, due to excess inventory, a protracted global recession and weakening demand in China.

For its output reductions, Freeport cited slowing global demand that weakened copper and molybdenum markets and chopped copper prices by over half in just two months.

Analysts applauded Freeport's efforts to address diving demand, but noted that nickel and zinc producers have gone much further in cutting global output than have copper suppliers.

"Copper producers in general have been slow off the mark in cutting production if you compare them with zinc or nickel producers, who have slashed quite aggressively," said Meir.

He added that supply reductions take time to carry out and seldom have a quick impact on falling demand.

"You're not going to lay off everybody. You have to phase it in, maybe go from 1,000t a day to 700," he said.

In China, Yunnan province surprised metal markets on Monday with a plan to buy base metals, including 150,000t of copper, and hold them for a year to support local smelters.

While supportive in theory, some analysts questioned whether the amounts would be entirely primary metal. Others said they would need to see solid evidence of the purchases before believing it was more than a ploy to talk up the price.

Even if the plan pans out, analysts said, stockpiles historically have not worked to address demand destruction.

"You can't replace world growth with stockpiling schemes. If just doesn't work out that way," said Meir.

Instead, they said metal consumers will need to see easier credit terms before increasing their spending. Tight credit conditions have impeded trade and created pent up demand.

"This is a demand destruction scenario and a loss of confidence all over the place," said Mo Ahmadzadeh, president of Mitsui Bussan Commodities (USA) Inc.

"Commodity markets as whole are in exactly the same boat as credit markets and equity markets in that they just don't know what's coming around the corner," he added.

In the meantime, they said, look for more copper price declines.

"We're seeing on the supply side producers being far more practical than they have been in the past. But, until we get some improvement on the demand side any price rallies will be seen as short-covering moves," said a New York metals dealer.

(Reuters, Dec 4)