UNITED KINGDOM September 10 2015 2:45 PM
LONDON (Scrap Register): Copper prices have fallen in recent years, pulling the miners down with them. Of course, challenges to the commodities sector have been heavily influenced by a mismatch between demand and supply growth.
Looking at demand first, the rebalancing of China’s economy and cautious stimulus has been particular problematic for those commodities which the country imports heavily.
In fact, while China will remain a key market participant Bank of America Merrill Lynch believes the nation has lost its role as the sole driver of bull markets. Against this backdrop, miners have started adjusted their portfolios, most notably cutting capex and production costs.
Taking a closer look into the producers’ response to the challenging operating environment, miners have reacted with a host of measures to the supply overhang. Most notably perhaps, capex was cut partially to preserve capital.
In addition, miners have also worked hard to prevent margin compression by reducing production costs. Of course, this has led to a shift lower and a flatter costs curve, which in turn meant that every producer now has to run faster just to stand still. In bank's view, the current status quo is not sustainable, mirrored in increasingly stretched balance sheets of some producers, rising yields and higher CDS.
Given continued price declines, but also considering that the Fed will start hiking rates, the funding environment may not get easier going forward. Hence, BofA Merrill Lynch believes that it may get increasingly difficult to justify running loss making operations.
Given that prices have cut deep into the cost curve, this suggests that production curtailments may be one of the next lines of defence for some miners, reflected in announcements of actual or planned output cuts by companies including Freeport in recent weeks. Putting it all together, the supply discipline may help rebalance the copper market quicker and could ultimately help stabilise prices or even bring about a rally.