Headline: Price crunch takes a bite out of metal miners
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By Lida Poletz
LONDON, Jan 29 (Reuters) - Base metal producers worldwide,
particularly in the copper industry, are cringing at slumping
metal prices, and a spate of mine closures has already begun.
Speculation of more shut-downs and delays is rife, although
industry analysts say substantial production cuts will be needed
to tip the market balance away from surplus.
So far, the copper market has seen mine cutbacks amounting
to 110,000 tonnes of refined output since metal prices dived in
the latter half of last year on tumbling Asian demand, according
to analysts at Macquarie Securities Ltd.
Another 250,000 tonnes of copper mine output could face the
chopping block, Macquarie said in report.
"Part of the reason prices have stabilised recently is due
to the closures. But to change the mindset of the market you'll
have to see a lot more down," said Macquarie analyst Jim Lennon.
"There is still going to be a lot of copper hitting the
market over the next 2-3 years," he added, projecting a market
surplus of 300,000 tonnes this year.
Prices in all metals are suffering from depressed demand as
Asia's economic crisis unfolds -- most of them are at their
lowest since the last bear market cycle in the early 1990s.
Copper's ballooning supply surplus means it is especially
affected, and high-cost and smaller producers will be worst hit.
In recent days, Australia's Cobar mine closed, taking some
30,000 tonnes of copper annually out of operation, and U.S.
Cyprus Amax Minerals Co (NYSE:CYM) announced cut-backs amounting to
27,000 tonnes.
U.S. producer ASARCO Inc (NYSE:AR) said this week its earnings
had dropped so sharply it needed to cut costs by $50 million a
year.
Also this week, Chile's state-owned copper giant Codelco
announced a delay in a 100,000 tonnes expansion of its Radomiro
Tomic mine.
Next in line to crumble, some analysts guess, is Broken Hill
Proprietary Co Ltd (AUS:BHP)'s U.S. Robinson mine, where
production costs are estimated at around $0.80/lb -- on par with
current market price levels.
In contrast to previous market downturns, producers are
under pressure to respond sooner rather than later to lower
prices, as many have not hedged future output, said analysts.
"Prices have declined so quickly that producers are very
underhedged for 1999. Options are prohibitively expensive, so
because they're exposed there will be a quicker reaction than
there might be," Lennon said.
Benchmark three-months London Metal Exchange (LME) copper
prices have plummeted from a peak of $2,604 per tonne in June
1997 to a four-year trough of $1,648 this month.
Since then copper has edged higher and was trading around
$1,760 around midday on Thursday.
Analyst Robin Bhar esitmated closures amounting to 500,000
tonnes of output in 1999, leaving the market in a rough balance.
In the meantime, however, even modest cutbacks may serve to
shore up prices by boosting sentiment.
"The only saviour for the market is for supply to be
curtailed. There's a surplus of 300,000-350,000 tonnes this
year, but the cutbacks may not need as much as that," he said.
"The idea that producers are thinking about cutbacks may
actaully establish a floor for prices."
Looking ahead, smelter and refiner cuts could follow mine
closures, said Peter Hollands of Bloomsbury Minerals Economics.
"Maybe concentrate stocks aren't as high as we thought and
maybe smelter and refinery cutbacks may come much more quickly
on the heels of mine closures than is normal at this stage in
the cycle," Hollands said.
Other metals have not been immune to the pain.
The Faro lead-zinc mine in Canada closed this month because
of low prices, although analysts say the zinc market is strong
enough to withstand more cutbacks.
In nickel, ample supply and low prices are seen forcing the
closure of Cominco Ltd (TSE:CLT)'s U.S. Glenbrook smelter.
Shut-downs are unlikely in the comparatively bullish
aluminium market, say analysts.
But despite good demand and slow capacity growth, aluminium
will still likely see a 600,000-tonnes surplus this year due to
Asia, said analyst Anthony Bird of Anthony Bird Associates.
"In the present uncertainties, it would be entirely natural
for aluminium companies to hesitate slightly before deciding to
spend a billion dollars on a new smelter," he said in a report.
"So the financial turmoil can hit the supply side of the
equation at least as hard as the demand side."
On the other side of the supply coin, currency devaluations
are a blessing for tin producers in Malaysia, Indonesia and
Thailand, which account for 65 percent of world refined supply.
"A huge olive branch has been thrown to the beleaguered
producers by way of the plunge in the Malaysian ringgit,"
analyst Nick Moore of Flemings Research said in a report.
"Prepare for more tin production."
london.commodities.desk@reuters.com))
Copyright 1998, Reuters News Service |
