Andy Home: Glencore restructures – bosses Copper supply market

Glencore’s share price is down more than 50 percent from its 12-month high, which highlights the challenges them and other companies within the resource sector are facing. But every now and again, certain actions and the outcomes, show who the giants are of the game. In the below Reuters thought piece by Andy Home, he takes a look at how the market’s reacted given Glencore’s recent debt reduction initiatives (proposed asset sales, share sales and production cuts in Africa), and how they’ve altered the landscape. The announcement of these programs have boosted the share price by 17 percent, but more interestingly copper has also jumped around 5 percent. It’s some interesting insight, which shows that when it comes to copper, Glencore has shown they know a lot more about markets than most other producers. – Stuart Lowman

A file photo dated 14 April 2011 shows the company sign and in front of commodities group Glencore International AG in Baar, Switzerland.  The world's largest diversified commodities trader made a strong debut on the initial grey market 19 May 2011, five days ahead of the official launch at the London stock exchange on 24 May and Hong Kong on 26 May 2011.  EPA/URS FLUEELER
A file photo dated 14 April 2011 shows the company sign and in front of commodities group Glencore International AG in Baar, Switzerland. EPA/URS FLUEELER

By Andy Home

LONDON, Sept 9 (Reuters) – Glencore’s Monday announcement of a multi-pronged debt reduction programme has boosted its share price by 17 percent and the copper price by five percent from their respective Friday closes.

Maybe the Swiss commodities house hasn’t completely lost its markets mojo after all.

Its decision to suspend 400,000 tonnes of copper production capacity over the next 18 months has sent analysts scurrying back to revise their supply-demand spreadsheets.

Through luck or design the announcement was exquisitely timed to catch a market that was just showing the first signs of a short-covering reaction to the weeks of relentless selling pressure.

Read also: As Glencore leads, Anglo will follow – cut dividend, rights issue on cards

London Metal Exchange (LME) three-month copper hit a six-year low of $4,855 per tonne on Aug. 24 and closed last week at $5,120. It is currently trading at $5,380.

Glencore alone can’t put a floor under the copper market. Only China can do that. It is the slowdown in Chinese industrial activity that has sent all the LME base metals tumbling to their lowest levels since 2009.

But Glencore’s cutbacks, the most aggressive of any base metals producer in this part of the cycle, will certainly alter the supply landscape.

“KEEP IT IN THE GROUND”

Glencore chief executive Ivan Glasenberg has been a fierce critic of metals producers’ response, or lack of response, to low prices.

“We should not be increasing production in anticipation of China demand,” he said at the time of the company’s first-half results, adding: “Keep it in the ground, you can dig it out anytime.”

Of course it was those disappointing results and the accompanying cut in forecast earnings from its trading division that created the wave of shareholder pressure for Glencore to cut its debt in the first place.

Pressure which become irresistible when ratings agency S&P downgraded its outlook on the company to negative, a direct threat to Glencore’s credit-intensive trading business.

Low metal prices, particularly copper, and the potential for lower prices still are what triggered S&P’s warning.

Read also: Andy Home: Copper perfect bear storm sets stage for rebound

Glencore’s decision to curtail production at its Katanga operations in the Democratic Republic of Congo (DRC) and its Mopani mine and smelter in Zambia was a double-edged response, both helping its own bottom line and giving the copper market a much-needed supply-side fillip.

Both African Copperbelt mines are relatively high-cost components of Glencore’s copper portfolio with cash costs of over $2.50 per pound, or around $5,500, between them.

Both are scheduled to undergo major upgrades over the next year or so to reduce those costs. A shaft infrastructure rebuild at Mopani and a build-out of whole ore leaching capacity at Katanga will slash costs to $1.70 and $1.65 per lb respectively.

The work is scheduled for completion in the first half of 2017, which is the approximate time-line for the curtailments.

THE FIRST CUT IS THE DEEPEST

The cuts are the deepest announced yet in the copper market, but they do add to a growing producer response to low prices.

Freeport McMoRan will chop around 68,000 per tonnes both next year and in 2017 by suspending its Miami mine in Arizona and reducing output at both its Tyrone mine in New Mexico and its majority-owned El Abra mine in Chile.

Asarco, the U.S. unit of Grupo Mexico, will cut operating rates at its Ray complex in Arizona, resulting in around 30,000 tonnes per year lower production.

Interestingly, all three producers are taking the cuts at mines that either directly produce refined metal via solvent-extraction-electrowinning (SX-EW) technology or that are integrated into smelter-refineries.

This is important since it means the cutbacks will impact immediately the refined copper market rather than being transmitted, possibly with reduced effect, through the raw materials chain.

Read also: Freeport to resume Indonesian copper exports

And, together with another shutdown in the Copperbelt, the Chinese-operated Baluba mine, they are forcing a collective reassessment of copper’s supply-demand drivers.

Analysts at Macquarie Bank, for example, said they had “stripped a massive 345,000 tonnes of supply from the 2016 balance, pushing it into a 248,000-tonne deficit.” (“Copper supply wobbling on cuts,” Sept. 8, 2015)

These price-related cutbacks, by the way, come over and above the unforeseen hits to copper mine supply which have also been accumulating this year.

TIGHTER MARKET?

Moreover, this rethink of copper’s expected dynamics going forwards comes at a time when the refined market is showing signs of tightening anyway.

The flow of metal into China is reduced on last year’s levels but it remains robust at a cumulative 1.94 million tonnes in the first seven months of 2015.

Bonded stocks in China are falling and physical premiums rising, suggesting the country’s appetite is going to remain at least as strong over the coming few months.

Headline stocks registered with the LME, currently at 346,850 tonnes, have been flat-lining in recent months after surging in the first quarter.

On-warrant stocks of 289,175 tonnes are close to two-month lows after a spate of cancellations in preparation for physical load-out.

And of course much of what is in the LME warehouse system, something between 50 and 80 percent, is still tightly controlled by a dominant long.

Read also: China’s slowdown shows up in junkyards – copper scrap

It has been straddling the nearby spreads for many months and the front part of the LME curve has accordingly remained tight for many months. The benchmark cash-to-three-months spread was valued at $20 per tonne backwardation at Tuesday’s close.

None of which is to say that copper couldn’t yet head lower, however strong the current short-covering momentum.

There are still plenty of super bears out there. Bank of America Merrill Lynch has just joined their ranks, slashing its copper forecast for next year to $4,513 per tonne.

Everything comes down to China, the root cause of metals price weakness across the board.

And even the mighty Glencore is in the dark as to what exactly is happening in China. “That’s the one we are all struggling to read, demand in China,” Glasenberg admitted at the time of the first-half results release.

So Glencore is making good on its promises, delivering the market the sort of producer response that changes both the short-term market momentum and the medium-term supply dynamic.

Glasenberg and his management team have taken something of a drubbing in the press over the last few days, some of it tinged with barely-concealed schadenfreude.

But when it comes to copper at least, they’ve shown they still know a lot more about markets than most other producers.

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