A resurgent copper price has led many investors to believe that the worst could be over for the volatile red metal. Prices plunged to six-year lows of $4,860 per tonne in late August thanks to worsening concerns over the Chinese economy, but the metal has since snapped higher and was last dealing around $5,400.
Naturally this has provided the share prices of miners like Rio Tinto (LSE: RIO), Anglo American (LSE: AAL) and Antofagasta (LSE: ANTO) with fresh fuel, and the businesses have all risen by around 10% during the past week alone. But are investors merely buying into a ‘deadcat bounce’?
Positive supply news! Well, sort of…
Whilst benefitting from a general improvement in market appetite, the copper price has also been buoyed by bubbly fundamental news this week, namely that emanating out of commodities goliath Glencore (LSE: GLEN).
The company — whose output of almost 1.3 million tonnes in 2014 put it amongst the top three copper producers last year — announced that it was suspending productions at its Katanga and Mopani assets in Africa for 18 months. Said mothballing is expected to remove 400,000 tonnes of copper cathode from the market.
But in Glencore’s characteristically bullish manner, the firm advised that “we remain very positive on the long-term outlook for our business” and expansionary plans at the assets are to continue. As the Financial Times notes, Glencore hopes to lift Katanga’s output to 280,000 tonnes each year once the suspension is lifted, up from 158,000 tonnes in 2014. And production at Mopani is predicted to rise to 140,000 tonnes per annum from 110,000 tonnes last year.
Long-term fundamentals remain a concern
Glencore, like much of the industry, is banking on a strong demand bounce beyond 2015 and consequently a steady reduction in the market surplus. And it is not alone in this respect: fellow diversified giant Rio Tinto is undertaking work to supercharge output from its gigantic Oyu Tolgoi and Escondida assets, for example, while dedicated copper digger Antofagasta has big plans for its Los Pelambres and Antucoya mines.
And I believe that the industry’s major players are underestimating the potential effect of a prolonged economic downturn , too. Bank of America-Merrill Lynch advised this week that the cooling Chinese economy is likely to prove rather more than a cyclical phenomenon, and expects weakness within the Asian powerhouse to linger for some time to come.
Indeed, the bank predicted that copper could even plummet as low as $4,000 per tonne during the final quarter of 2016, as subdued cross-sector demand in China and ineffective stimulus measures from Beijing continue to weigh on raw material prices.
Bank of America quite rightly asserts that further copper price weakness would most likely “lead to an acceleration in mine closures.” But given that low-cost producers continue to increase output at an alarming rate, defying the market’s chronic supply/demand balance, and that data from China continues to worry, I believe investors in the mining sector are making a colossal gamble.
