Metals Rout Driving More Miners to Edge on Production Losses

  • Prices at 6-year low means more production is making a loss
  • More than two-thirds of nickel supply is now unprofitable

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 26 percent this year, the most since the financial crisis in 2008, amid a slowdown in top commodities user China. While that’s 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 percent of aluminum production and a quarter of zinc supply is now losing money, according to Standard Chartered.

With a 12 percent slide in zinc prices this month, the amount that the bank estimates just became unprofitable is equal to about 6 percent of global mined production and roughly double this year’s production at Century in Australia, the country’s largest open pit zinc mine. The 11 percent slump in nickel means about another 120,000 tons of output is losing money. Copper dropped 10 percent 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.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE