Unexpected mining cutbacks point to copper price recovery

London

COPPER mines from Australia to Zambia are confounding forecasters as slumping prices and mine disruptions threaten to erase a global production surplus.

Companies including BHP Billiton Ltd and Rio Tinto Group have reported accidents and equipment breakdowns while announcing 2015 spending cuts that Macquarie Group Ltd estimates at US$20 billion. The unexpected reductions mean mines may produce less, with any excess gobbled up by expanding government stockpiles in China, the top user, Bloomberg surveys of analysts showed.

Banks including JPMorgan Chase & Co have revised output forecasts with prices hovering near a five-year low. While China's State Reserve Bureau may buy less metal than last year, the country still uses one of every two tonnes the world produces for power lines and appliances, and won't need to import much to mop up the surplus.

"I would expect them to buy," Rodrigo Toro, corporate sales vice-president at Chile state-owned Codelco, the world's biggest copper producer, said in a Feb 26 interview at Metal Bulletin's International Copper Conference in Brussels.

"Everybody's price expectation is that we will see a recovery."

The rally already has begun. Copper jumped 7.3 per cent on the London Metal Exchange last month, the most since September 2012, and closed Monday at US$5,905.50 a metric tonne.

Prices may gain 12 per cent further to US$6,600 this year, a Bloomberg survey of 10 analysts showed.

Copper remains well below the record of US$10,190 in 2011, and mine owners started cutting output after a 23 per cent slump in prices over the past two years. Production this year will rise 1.5 per cent from 2014, down from a forecast of 6.6 per cent made at the beginning of last year, JPMorgan said on Feb. 20.

BHP, the world's largest mining company, plans to cut project spending to the lowest since 2010, following similar reductions by fellow producers including Phoenix-based Freeport-McMoRan Inc. Rio Tinto, based in London, said output will be less than expected at its Kennecott mines in the US this year, and Toronto-based Barrick Gold Corp in December said it would suspend its Lumwana mine, citing lower prices and Zambia's new tax regime.

Repairs needed at BHP's Olympic Dam mine in Australia will reduce refined-copper production by as much as 70,000 tonnes, the Melbourne-based company said in February. In Chile, the largest producer, an industry group estimates 168 small operators shut down amid rising costs and the prolonged price slump.

The disruptions mean almost 500,000 tonnes of mined output will be lost, leaving a deficit of 245,000 tonnes this year, Bank of America Corp said last month. Macquarie said on Feb 23 that the 2015 production shortfall will be 30,000 tonnes. In January, the bank had predicted a surplus of 104,000 tonnes, down from an October estimate of 475,000 tonnes.

In a Bloomberg survey of 15 analysts late last month, the surplus was estimated at 150,000 tonnes, excluding purchases by China for its stockpiles. That's down by a third from 223,500 tonnes forecast at the start of the fourth quarter, based on the median from a survey of 10 analysts. China may buy about 200,000 tonnes for strategic inventories this year, according to the median of the 12 respondents in the recent survey.

Last year, China's State Reserve Bureau bought up to 1 million tonnes of copper, helping to erase a surplus, Bloomberg Intelligence estimates.

Overall, the country is expected to import less metal this year as it boosts domestic production and the economy expands at the slowest pace since 1990.

"SRB only needs to buy a little and you've got a balanced market again," Robin Bhar, an analyst at Societe Generale SA in London, said by phone Feb 23. "The caveat being that Chinese demand doesn't weaken further." About 40 per cent of the copper China uses ends up in its expanding power grid, UBS Group AG estimates. Investments in electricity infrastructure will increase 8.4 per cent this year, the Zurich-based bank said.

"The Chinese clearly feel vulnerable about copper" so they "stockpile selectively", said Jim Lennon, a consultant to Macquarie in London.

While some mines are reducing output, warehouse stockpiles are up on slowing economic growth and weak demand. Inventories tracked by the LME climbed 68 per cent since the end of December to 297,200 tonnes. They may reach 600,000 tonnes, Societe Generale said in a report in February, a sign of ample supplies.

Prices may be too high to encourage much stockpiling by China, which historically buys copper when some producers are losing money, according to Goldman Sachs. The SRB may wait until the metal reaches the low US$5,000s, the bank said. BLOOMBERG