Metals Cutback Rebound Vanishes as Demand Seen Key to Recovery

Updated on
  • Chinese smelter cuts to offer only short-term respite: MS
  • Producers may not stick to supply reductions if prices rise

First zinc, then nickel, and now copper. Production cuts by the world’s biggest supplier are failing to prop up beleaguered markets.

Prices have wiped out gains after Chinese smelters banded together in the past two weeks to fight low rates with coordinated reductions. The latest effort from copper producers to trim output by 350,000 tons sparked a rally of 1 percent on Tuesday that’s since gone into reverse.

For analysts at Morgan Stanley, this reflects doubts over whether individual companies will stick to agreements to restrain supply when prices rise. And it highlights what metals markets are desperate for: a pickup in demand.

“For a sustainable lift in copper, nickel and zinc prices, these markets actually need a recovery in demand growth,” analysts led by Tom Price said in a note Dec. 2. The most probable source of this would be “renewed stability” in demand expansion and the economy in China, or an “outright lift” in developed regions of the U.S., Europe and Japan.

Metals producers worldwide are gauging their response to prices at multi-year lows amid a slowdown in Chinese consumption and a glut of inventory. China’s zinc smelters announced cuts of 500,000 tons on Nov. 20, also spurring a fleeting rally, while nickel prices plunged 4.6 percent on the day producers vowed to cut output 20 percent.

Such informal alliances in a fragmented market will be “immediately tested” if prices rise, the Morgan Stanley analysts said. “For if any player breaks rank, all other players will follow, returning prices to their local lows,” they said.

The bank won’t include the Chinese reductions in its list of announced cutbacks because it doesn’t see them as sustainable, the analysts said.

Morgan Stanley’s view echoes that from Goldman Sachs Group Inc. which says only a recovery in China, the biggest consumer, will be enough to rescue prices. Demand for metals in the country is in the middle of a hard landing as consumption from the construction, auto and power industries slows, analyst Fu Yubin said in Shanghai last month.

Similar pledges to cut supply from aluminum producers in China have rarely held together, analysts from Standard Chartered Plc said last month, while concentrate freed up by the reduction could be redirected to other smelters.

The London Metal Exchange Index of six base metals is heading for a 26 percent decline this year, the worst annual performance since 2008, and prices are at multi-year lows. Copper fell 0.9 percent on Thursday, extending a 1.5 percent drop a day earlier and more than erasing a 1 percent gain Tuesday.

The cuts may at least be a sign that producers in the country are taking the situation more seriously, Helen Lau, an analyst at Argonaut Securities (Asia) Ltd, said in a phone interview this week. “It’s something new, especially for the producers and China overall in how to manage overall capacity,” she said. The copper smelters also pledged not to build new refineries and urged the government not to approve new projects.

Producers outside China have taken a mixed view on cuts. Glencore Plc shut facilities in central Africa to trim supply, while Codelco, the world’s largest producer, said it won’t reduce output and will focus instead on paring costs.

— With assistance by Martin Ritchie

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