For the last year, copper and zinc prices have fallen by more than a quarter. Some days ago, the major commodities trader Glencore (L:GLEN) decided to sell its two copper mines that provide 2% of global copper supply and to cut its zinc production by 4% of global zinc supply. Thus, the company expects to support the global base metals prices and to settle some of its debts. On the other hand, the concerns around the economic slowdown in China, the major copper importer, are rising. Where can we see the copper and zinc prices the coming month and will commodities companies place further pressure upon base metals pricing?
The Swiss Glencore is selling some of its assets, which does not surprise us. The company’s stocks have slumped 60% since the start of the year. Its current capitalization is $26.2bln, which is far below the net debt of $30bln. The main metallurgical asset that Glencore is depriving of to lower the credit burden is the nickel field Araguaia in Brazil estimated in about $8bln. Moreover, two rather small copper fields in Chile and Australia will be realized at about $0.5-0.6bln. They provided Glencore with about 15% of its gross copper production, so the move is unlikely to influence the global markets significantly. Nevertheless, driven by low prices, the company cut its gross copper production in the first half year by 3%, or 26.4 thousand tones. Early in September, Glencore said it was planning to freeze production on its mines in Congo and Zambia. The move will deprive the global market of 400 tones of copper. This news has not influenced copper prices significantly. But later too, other companies, Freeport-McMoran (N:FCX) and KGHM (L:0O8D), announced production cuts. This week they were accompanied by another mining giant Rio Tinto (L:RIO) that is planning to reduce copper production this year by 11-17%, which accounts for about 70 thousand tonnes.
Despite all this news, global markets do not look enthusiastic. The production cuts are scheduled only for the future, while the copper stockpiles in Shanghai Futures Exchange depots have shown a weekly rise of 11.4% due to the slowing China’s economy. The Chinese GDP is forecasted to slow down to 6.5% next year from 6.8% expected this year. For this reason, the market participants expect the global copper glut to reach the volume of 349 thousand tones. This is much more than their forecast of excessive 194 thousand tones three month ago. The consensus forecast predicts the contraction of copper surplus to 177 thousand tones next year but it barely supports the prices.
We believe that the main copper producers have already had their say on the matter and the global production will inevitably contract. It partly makes the market more predictable. In our opinion, now it will better response to the macroeconomic data from China and U.S. For instance, the significant copper price movements are possible after the release of the Chinese GDP for the 3rd quarter, September industrial production and retail sales on Monday morning.