LONDON, Dec 9 (Reuters) - Copper prices have collapsed over the last few months but there is a growing body of opinion that they have not fallen far enough relative to the other LME metals.
There is concern that copper producers have not been responding fast enough to plummeting global demand for the red metal, leaving the copper market vulnerable to further price weakness in the coming period.
Since the London Metal Exchange (LME) copper contract is commonly viewed as the bellwether of the base metals complex, often determining overall mood and price direction, the implications are equally significant for the rest of the LME pack.
SUPPLY RESPONSE LACKING
So far, only one of the world's big copper producers, Freeport McMoRan, has announced any cutbacks at all.
The U.S. company said it will cut production by 200 million pounds (around 91,000 tonnes) next year and by 500 million pounds (around 227,000 tonnes) in 2010.
Besides Freeport, the collective supply-side response to global manufacturing recession has been highly muted.
A clutch of mines have shut up shop in Canada but they have largely been by-product copper producers, such as First Nickel's Lockerby (nickel) and Breakwater Resources' Myra Falls (zinc).
Other casualties have been almost too small to notice, such as Dundee Precious Metal's Deno mine in Armenia.
Closures in the Democratic Republic of Congo are more significant on paper at least, but in cases such as Camec's properties in the country, the affected operations are still at an early stage of development.
Compare and contrast with nickel. Most of the world's biggest producers, namely the likes of Vale, Norilsk Nickel, Xstrata and Jinchuan, have closed operations and/or cut production guidance for 2009.
In zinc, the process is even more advanced. Significant amounts of mine capacity have been put on care and maintenance, the process now moving down the supply chain to the smelter stage.
The lagging producer response in copper is due to relative price performance. While prices for zinc, nickel and most of the other metals in the LME complex have fallen deep into producer pain territory, copper prices are still resting at the very top end of the production cost curve.
COPPER RESILIENT...
The reason for copper's relative price resilience is its different starting point ahead of the liquidation rout of the last three months.
LME three-month copper was valued at $8,055 per tonne on July 31, 2008, still showing a strong year-to-date gain of 21 percent. On the same day, nickel prices were already down by 30 percent on the start of the year, while zinc prices were down by 20 percent.
Nickel was suffering from weakness in its biggest consumption sector, stainless steel, while zinc was paying the price for the surge in supply that followed its super-strong rally of 2005-2006.
Conspiracy theorists -- of which there are always many in the copper market -- will suggest otherwise, but copper's price strength had solid underpinnings in the first half of the year.
Global exchange stocks at the end of July were 187,225 tonnes, down by 51,114 tonnes on the start of 2008 and still extremely low by any historical yardstick.
At the same time, mine production was underperforming on a massive scale. Copper in concentrates production fell by 1.7 percent year-on-year in the January-August 2008 period, according to International Copper Study Group (ICSG) figures.
This combination of low stocks and constrained production kept copper prices at elevated levels in the first half of 2008 and have shielded the red metal from the total price capitulation experienced since by some of the other LME metals.
...BUT FOR HOW LONG?
How long copper can remain shielded is a moot point. One part of the previous bull equation is now starting to shift dramatically.
Global exchange stocks of copper increased by almost 100,000 tonnes over October and November. LME stocks have just risen past the 300,000-tonne level for the first time since early 2004. This is a sign that copper is not going to decouple from the demand-side weakness that is battering the entire spectrum of industrial commodities.
If visible inventory keeps rising at this sort of pace, it will soon nullify any previous supply-side-disruption premium that was built into the copper price.
And with global demand fast disappearing down the plughole, the pace of stocks increase may actually accelerate in the coming months.
This changing dynamic is starting to focus minds on the need to cut back production. It seems that it will be the smelters rather than the miners who first bite the bullet, facing as they do the unattractive combination of fading demand for their product (refined metal), lower copper prices and lower by-product sulphuric acid prices.
Indeed, two big Japanese producers, Nippon Mining and Sumitomo Metal Mining, have signaled that they intend to cut production in the first half of next year. Both companies are still evaluating how big any curtailment should be.
This supply-side response, though, is still embryonic and many other producers have yet to make the thought process leap from deficit to surplus market.
As such, those who argue that copper has some catching-up to do on the downside may have a valid point.
That in turn could spell trouble for the rest of the LME pack since another leg down in copper prices risks dragging the other metals beyond existing capitulation price levels. (Editing by Karen Foster)
