Glencore cuts transform copper market outlook ahead of contractual talks

Glencore’s move to cut 400,000 tonnes of cathode production in Zambia and the Democratic Republic of Congo has transformed the outlook for the copper market over the coming year, just as market participants start limbering up for annual contractual negotiations.

Trading company and producer Glencore’s move to cut 400,000 tonnes of cathode production in Zambia and the Democratic Republic of Congo has transformed the outlook for the copper market over the coming year, just as market participants start limbering up for annual contractual negotiations.

Following on from significant cuts announced by BHP Billiton, Freeport and Asarco in recent weeks, Glencore’s announcement has caused projections for the 2016 market balance to be slashed even further, leading some analysts to forecast a deficit for next year.

As part of a $10.2 billion debt-reduction drive, Glencore announced on Monday that it plans to cut copper production by 400,000 tonnes over the next 18 months at its majority-owned subsidiaries Katanga Mining and Mopani Copper Mines, based in the DRC and Zambia respectively.

Collectively, the cuts could aid producers in contractual negotiations as they look to defend against consumers’ and traders’ demands for lower benchmark cathode premiums for Asia and Europe, market sources said.

Both regional markets have loosened beyond expectations throughout 2015, and prior to Glencore’s announcement on Monday there was a broadly held view that contractual premiums will fall significantly next year.

While many market participants still expect a sizable reduction in Asian and European benchmark premiums, the production stoppage at Glencore’s largest African assets will play in producers' favour as they look to limit the decline, market sources said.

“What this really shows is that the copper market is very intolerant of the price trading into the cost curve, and when it does, supply cuts come in with much greater alacrity than you’d see in aluminium, for example,” Vivienne Lloyd, base metals analyst at Macquarie, told Metal Bulletin.

“Premiums have [still] got to come down, particularly in Europe. For the past few years Europe has been able to ship the surplus it generates over to China with no problems, but this year, because the financing trade has dried up, it’s been forced to sit in its own excess, and the market is looking very loose,” she said.

“And in Asia, there’s no reason to have $130 premiums because the financing demand isn’t there to support it, so no doubt premiums will slip there as well, but the market is looking tighter [after these cuts],” she said, adding that the bank is now forecasting a 230,000-tonne deficit for 2016.

As well as enlivening benchmark premium negotiations, the cuts could also help to put a floor under copper prices, although stronger demand will be necessary to lift prices significantly higher, a second analyst told Metal Bulletin.

“In my experience, cuts beget cuts, in that other producers are often emboldened to take action after seeing others make the jump. It can’t be anything but positive for the copper market,” he told Metal Bulletin.

“If you look back to the last time we had big market-related cuts back in 2001, it took a while for prices to react, but the cuts did signal the bottom of the market. Shutting off supply tends to provide a floor, but what really gets prices moving is positive news on the demand side. We’ll have to wait and see what happens on that front,” he said.

“My view is that we’re close to the bottom,” he added.

Glencore itself also expects the move to support copper prices, which have slumped to six-year lows on the back of oversupply, weak investor sentiment, and fading Chinese demand.

“What this shows is that we do subscribe to the supply discipline strategy in our business, and taking 400,000 tonnes out of the market should have a positive effect,” ceo Ivan Glasenberg said in a conference call on Monday.

In the Copperbelt itself, Glencore’s planned cuts could also have a knock-on effect in the local concentrates market, as rival smelters look to take in third-party raw materials that have until now been processed at the Mopani Copper Mines smelter in Mufulira, market sources also said.

The Mopani smelter has been treating significant volumes of third-party concentrates, and the mothballing of the plant may result in feed being shipped to rival processors such as First Quantum’s Kansanshi or Konkola Copper Mines’ Nchanga plant.

"If they're closing Mopani, that could have a local effect, but really this is geared towards tightening up the cathode market and supporting the price," a concentrates trader told Metal Bulletin.

Effective immediately, the mining and smelting operations will be placed under care and maintenance until expansion works designed to boost production and reduce costs are completed at both Katanga and Mopani, Glencore said on Monday, in news that sent the company’s share price up more than 10% in London.

The company’s shares hit record lows last week amid concerns that, due to its heavy debt load, Glencore would be unable to maintain its credit ratings in a weak price environment in its key markets.

The decision to reduced debts by a targeted $10.2 billion will ensure the company’s debt-to-earnings ratio remains below 3 in the event that the prices of copper, coal or other key commodities fall further, Glasenberg said on Monday.

In the case of copper, the target gearing ratios could be maintained if prices fall to $2 per lb ($4,400 per tonne) or below, he said.

“After listening to shareholders we decided to make our balance sheet bulletproof,” Glasenberg said.

Mark Burton 
mburton@metalbulletin.com
Twitter: @mburtonmb

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