Counting Copper
Drops in production may be misleading
interactive.wsj.com
By David Bogoslaw
Production cutbacks galore. Decisions by speculative funds to wipe out their longstanding net short positions. A weak economy. And Enron's implosion.
All these factors have contributed to copper's wild ride this year. But now that prices have rebounded to a high of 73.70 cents a pound after sliding to the brink of 14 1/2-year lows just above 60 cents a pound in early November, market players are taking a closer look at announced production cutbacks.
Last week's news that Chile's state-owned producer, Corporacion Nacional del Cobre de Chile, or Codelco, would make good on its November promise to reduce output in 2002 by 100,000 metric tons helped push prices higher. But it couldn't keep them there.
"Now people are starting to get specific. They're making a distinction between production-cut announcements and actual [refined] product coming off the market," notes Dave Meger, a senior metals analyst at Alaron Trading, a brokerage firm in Chicago.
At first, the production cuts sounded fairly straightforward: Phelps Dodge would trim 220,000 tons, BHP Billiton would axe 170,000 tons, and so on.
However, in early November, when Codelco first announced its plan, it mentioned that it would shift to processing lower-grade ores. That raised concerns in the market that the company could easily return to processing high-grade ores -- in effect, boosting production -- at the first hint of stronger demand and sustained higher prices.
The announcement last week of 150,000 tons of additional production cuts by various producers was also less than it appeared to be, according to minerals economist Kevin Norrish at Barclays Capital in London. He thinks the actual reduction will be about 10% of that.
Offsetting reduced sales of copper cathode from the closing of Kennecott Utah Copper's North Concentrator next year was parent company Rio Tinto's plan to increase production of refined copper at one of its own underperforming plants, Norrish says.
Asarco, a subsidiary of Grupo Mexico, wasn't really cutting 110,000 tons of refined production, but only the 15,000 tons at its Mission, Arizona, operation. The 95,000 tons being axed at Asarco's Amarillo refinery was already discounted by the market which knew that it wouldn't be replaced after its supplier, Chemetco, declared bankruptcy and closed in October.
And a 15% reduction of annual copper smelting capacity Noranda would achieve by shutting its Gaspe smelter in Quebec is being counted twice, Norrish asserted, because it was included in mining curtailments previously announced.
However, even allowing for some duplication, John Gross, publisher of the Copper Journal newsletter, estimates that 700,000- 725,000 tons of output has been taken out of production plans. And that doesn't include Codelco's 100,000 tons, announced the day after Gross made his forecast. At the same time, in a November statement, the International Copper Study Group in Lisbon projected a worldwide production surplus of 540,000 tons for 2001.
Combined, the reports suggest that there may be a supply deficit sometime next year. If the U.S. economy turns up, copper prices might even boom. That's why traders and analysts are closely scrutinizing cutback announcements.
John Gross warns that manufacturers, such as brass and wire mills, might opt for extended vacation shutdowns in early 2002, further damping demand.
Veteran commodities strategist Bill O'Neill, formerly of Merrill Lynch, agrees that this is a possibility. And he adds that consumers' minimal inventories and insufficient hedges could prompt them to start buying physical metal soon if the price uptrend continues. "But with that overhang of stocks, I don't think there's any rush for anyone to come in," he says.
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