Copper Pain Seen Not Deep Enough to Spur Cuts Needed to End Glut

  • `Some sort of increase in demand' needed, Oppenheimer says
  • Price could drop 25% more before `meaningful' cuts: BI

Copper at $2 a pound got the market’s attention, but it will fail to spur big enough production cuts to reverse a glut of the metal.

Futures, which Thursday traded below $2 for the first time since 2009, could drop as much as 25 percent more before the industry implements “meaningful” reductions in output, according to Kenneth Hoffman, a senior analyst of metals and mining at Bloomberg Intelligence. That’s because prices are still above production costs, allowing producers to wait and “let the other guy” curb output, Hoffman said.

“If you have these temporary blips below $2, they make for great headlines, but I don’t think they change the decision making of these companies,” Dane Davis, an analyst at Barclays Plc, the top copper forecaster for the fourth quarter of 2015, said in a telephone interview from New York. “If prices move down below $2 and they stay there, then it’s likely you’ll have additional production cuts.” Futures recovered to $2.0275 at 9:14 a.m. on Friday.

Output topped demand last year by about 342,000 metric tons, the largest glut since 2012, and will remain in surplus for at least the next two years, according to Bank of America Corp. The excesses developed after miners invested heavily in production over the last decade to feed record growth in China, which consumes 45 percent of the metal. Those materials began to arrive just as demand slowed in the Asian nation.

Adding to pressure on commodities last year was the Federal Reserve’s decision to increase interest rates for the first time in nine years, strengthening the dollar to the highest since at least 2004 and damping demand for raw-material imports from other countries with weaker currencies.

“It’s the demand side that is causing the majority of the concern on what’s going to happen to copper,” George Zivic, a portfolio manager of the Oppenheimer Commodity Strategy Total Return Fund, said in a telephone interview from New York. “The copper that’s coming on line on the supply side has been in the works for many years and many billions of dollars are invested, so there’s no stopping that. So in lieu of that you need to see some sort of increase in demand.”

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