Metals rout means struggling miners are even more unprofitable

[LONDON] To see how disastrous this month's metals selloff has been, add up the output from one of the world's biggest copper mines and two giant zinc projects.

This month's drop means another 500,000 metric tons of copper are unprofitable, an amount similar to the capacity at Chile's Los Bronces mine, according to Standard Chartered Plc. For zinc, an additional 800,000 tons of output is losing money. As metal prices hit new six-year lows, the losses at global mines keep adding up.

"It's effectively a game of blink and holding out as long as it's possible," said Nicholas Snowdon, an analyst at Standard Chartered in London. "We have to see wholesale production cuts emerging from base-metal producers. If the cuts don't emerge, then the complex will continue to grind lower." The London Metal Exchange's index of six main contracts slid 25 per cent this year, the most since the financial crisis in 2008, amid a slowdown in top commodities user China. While that has hurt profits for mining companies and prompted some of them to reduce output, more cutbacks are needed to trim the glut of metals. Zinc has extended its retreat even after Glencore Plc cut production by a third and Nyrstar NV said it may curtail as much as 400,000 tons if prices stay low.

More than two-thirds of mined nickel, about 60 per cent of aluminum production and a quarter of zinc supply is now losing money, according to Standard Chartered.

With an 11 per cent slide in zinc prices this month, the amount that the bank estimates just became unprofitable is equal to about 6 per cent of global mined production and roughly double this year's production at Century in Australia, the country's largest open pit zinc mine. The 9.6 per cent slump in nickel means about another 120,000 tons of output is losing money. Copper dropped 9.2 per cent in November.

Even with metal prices about half the level they were in 2011, some companies are willing to keep supply coming. Vedanta Resources Ltd said it's boosting zinc production and Codelco, the largest copper producer, said it's maintaining output targets.

"Producers are still playing the last man standing game of Russian roulette," Malcolm Freeman, a director of West Malling, England-based brokerage Kingdom Futures Ltd, said in an e- mailed note this week.

BLOOMBERG