Capex cuts to magnify metal shortages created by low quality ore

09 January 2017

Successive annual cuts in mining exploration budgets are expected to add impetus to a metal price revival in the coming years, as a lack of investment exacerbates deteriorating ore quality for key metals such as copper, zinc and nickel.

Despite political turmoil in many parts of the world, expectations of robust growth mean metals — along with most key commodities — are showing signs of escaping a multi-year downturn, partly due to firm demand in top consumer China.

Recovery comes after a bear market which started in 2008 — with a temporary reprieve between 2009 and 2011 created by a massive Chinese stimulus amounting to four trillion yuan.

The prolonged downturn due to oversupply and slow demand growth in China meant plunging revenues for miners, which embarked on debt cutting programs.

Capital expenditure cuts by miners were estimated by Citi analysts at around 9 percent in 2013, 19 percent in 2014, 24 percent in 2015 and another 24 percent in 2016 to $52.3 billion in total. This year and next they expect further cuts of five and two percent respectively.

“Project cancellations, deferrals and canceled exploration mean lower supplies; a positive in a world that is not in recession,” Fidelity Investments portfolio manager Joe Wickwire said. “The companies that had the most debt cut the most.”

One of these was Swiss-based Glencore, which in December said it was on track to cut its net debt to $16.5-$17.5 billion by end-2016 from $30 billion in 2015.

Glencore in the first half of 2016 reduced overall capex on copper by 42 percent to $751 million from first half 2015. For zinc the number was cut 50 percent to $213 million, while nickel capex was cut 18 percent to $211 million.

“There is a bullish longer term commodity specific story in terms of supply,” said Haitong Bank analyst Andrew Keen. “For copper … there’s not really any significant capex going toward greenfield (new) projects.”

A dearth of new copper projects means supply will grow at a slower pace than demand, leaving deficits, which Morgan Stanley expects to see at 18,000 tonnes next year, rising to 670,000 tonnes in 2021 or about 2.7 percent of global demand estimated at 24.5 million tonnes.

“If copper is going to be in deficit then the implication is prices would have to go to a level that incentivizes investment in exploration and new production,” Allianz Global Investors UK equities portfolio manager Matthew Tillett said.

Copper, used in power and construction, gained 40 percent to above $6,000 a ton between January and November last year.

Now trading at around $5,620 copper would need to settle above $6,200 before miners start to think about exploration and development, analysts and fund managers say, and even then the results will not be seen for years.

“Developing a mine, getting it up and running can take 5-7 years,” Jon Andersson, head of commodity investments at Vontobel Asset Management, adding that declining ore grade — less metal in the ore — has been a feature for some years.

Andersson estimates quality of ore in copper deposits has fallen about 30 percent since 2000. For nickel the decline is nearer to 35 percent, one reason why prices of the stainless steel ingredient spiked through $12,000 in November to their highest since July 2015.

Vontobel’s research shows the decline at 10 percent for zinc, used to galvanize steel, which surged to nine-year highs near $3,000 a ton in November.

Source – Reuters