Analysts over at Bank of America-Merrill Lynch have given the copper market further reason for worry in Monday trade. Having reiterated their bearish supply/demand outlook for the bellwether metal, the business suggests that copper could plummet as low as $4,400 per tonne in 2016.
The broker notes that, despite a swathe of capex reductions and cost-cutting across the sector, a poorly fundamental backcloth should keep the market in surplus until 2018 at the earliest. Indeed, Bank of America notes that “outright production curtailments, the most effective measure to rebalance oversupplied markets, have been few and far between.”
Consequently the bank believes copper will remain locked in a bear market as underlying consumption in China remains “muted,” and that suppliers remain reluctant to remove additional supply until prices fall further. The broker expects an average copper price of $5,602 per tonne for 2015 to fall to around $4,500 in both 2016 and 2017. The commodity was recently dealing around $5,250 per tonne.
Glencore corks copper output
Mining giant Glencore (LSE: GLEN) — which sources around a third of total earnings from the copper market — is naturally at severe risk of a further downturn in the copper price. To address this issue the firm announced plans this month to remove 400,000 tonnes worth of material from the market by shuttering its Katanga and Mopani assets in Africa for 18 months.
Although production curtailments are of course a step in the right direction — US giant Freeport McMoRan has also announced mine closures in recent times — Bank of America notes that “their peers have so far been reluctant to show production discipline,” and believes only a dive towards $4,400 per tonne will stoke the industry into action as margins come under pressure.
… but further production cuts required
Bank of America reckons another 500,000 tonnes of material will need to be taken out of the equation before the copper price bottoms. On a more positive note, the broker comments that this hefty target is certainly attainable as there are a range of projects spanning The Americas, Asia and Africa that are prime candidates for closure.
But signs from the industry suggest that any fundamental shift remains highly unlikely, with low-cost producers quite content to continue swamping the market with excess material. Diversified giant BHP Billiton (LSE: BLT) is increasing output at its Olympic Dam site due to mill improvements, and plans to supercharge long-term output through its underground expansion plans. Elsewhere, the firm’s ‘three concentrator strategy’ is expected to blast production higher at the Escondida project post-2016.
And Rio Tinto (LSE: RIO) — which also holds a stake in Escondida — received government approval for the underground development of the Oyu Tolgoi copper asset in Mongolia this month, unlocking one of the world’s largest copper reserves. Rio Tinto is also expanding a swathe of other top-class assets in the meantime to keep the market oversupplied.
And of course Glencore’s actions only provide the market with temporary support, as the business plans to work on expanding output at these African assets during downtime. With production ticking steadily higher across the industry, I believe copper prices are likely to keep languishing for some years yet, particularly if shipments to China experience a prolonged downturn.
