LME Week – Party like its 1999
For those with not too long memories we might conjure up an image of those heady (not in a good way) days of 2008 when attending a conference or investor day in the midst of the turmoil one would find oneself in barely half-filled rooms with those attendees who did show up glued to their phones looking for news of the next financial institution to go over the virtual Niagara.
Until last week, the annual LME Week “festivities” in London looked like they were heading the same way with nervous looking delegates likely to be monitoring the airwaves for signs of mortality at Glencore, the veritable Vatican of base metals trading.
Manna From Heaven?
However on the very eve of the event the gloom was suddenly dispelled by a dramatic turn in the fortunes of Zinc that stunned many players staging its largest one day move since 1989…
The move was attributed to the “baby out with the bath water” action of Glencore in shuttering some mines, including the Lady Loretta mine in Australia. The number of 500,000 tonnes of production being removed from the market was bandied around. Glencore said it would suspend production at its Lady Loretta mine in Australia and at Iscaycruz in Peru. It will also reduce output at McArthur River and the George Fisher mines, both also in Australia and some operations in Kazakhstan. The cuts are expected to result in about 1,600 job losses. The planned production cuts will also reduce Glencore’s output of lead by 100,000 tonnes a year.
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Reuters reported that Glencore mined almost 1.4m tonnes of zinc in 2014, and that its planned production cuts are equivalent to about 6.3% of all production outside China.
The theory is that this stores the value in the ground for Glencore thus potentially heightening the sale value should the assets need to be sold off. Many felt that this could help put a floor under the price of the metal, which has fallen to a five-year low on concerns about slowing economic growth in China.
This was “good” news in a fashion but I strongly suspect that there was a strong element of short-covering driving such a dramatic turnaround.
It should also be remembered though that Glencore has always made more from trading the metals than mining them so anything that gets the price of lead & zinc up puts more bread on the table of Glencore than just running mines at break-even or a loss.
One interesting tidbit I picked up was the suspicion that Glencore had gone massively long Zinc and associated metals, earlier the previous week before it announced its capacity shutdowns. One has to take one’s hat off to them in going long on their own misery!
This appeared to counter and more than reverse the mooted surplus that was announced in the projections of the ILZSG (the trade body for Lead & Zinc). They forecast the global zinc market to have a surplus of 88,000 tonnes this year, but expected to see a deficit of 152,000 tonnes next year. The ILZSG also said that the global lead market is forecast to have a surplus of 97,000 tonnes in 2016, compared to “a close balance” this year. Two large mines, Lisheen (owned by Vedanta) in Ireland and Century (owned by MMG) in Australia, were due to close anyway. Century alone produced about 400,000 tonnes a year of zinc.
In early September, Glencore announced plans to mothball two copper mines in Africa, its Mopani operation in Zambia and the Katanga facility in the Democratic Republic of Congo. Together, Katanga and Mopani produced 127,000 tons of copper in the first half of this year, about 17% of Glencore’s total output of about 730,900 tons. They were both said to be losing money. It claimed it would invest in the mines over the next 18 months to lower long-term production costs while hoping the price recovers.
In any case, Zambia has not been any copper miners favorite place this year as it flip-flopped on mining taxes and royalty hikes.
The closures by Glencore helped put a floor under the price of copper, which is responsible for around a third of Glencore’s earnings. It was noticeable that copper did not suffer falls to the same degree as zinc, in late September.
My attendance at a Non-ferrous alloys event was not exactly cheerful, though the crowd didn’t look too down in the dumps. Most events were liberally lubricated with alcohol in the great English tradition so there was always something to look forward to later that made ending it all with a rusty razor-blade less tempting.
The story was China weakness over and over again. Many found it hard to work out if product was coming into or out of that market. An example was ferrochrome where exports were supposedly rising while things for Chrome itself looked good as China was importing. Manganese was not looking happy and Moly was sick as a dog with even more production coming down the pike from mines where it was a by-product and thus relatively unavoidable. The price now seems so low for Moly that it almost counts as a deleterious compound.
Specialty metals also were on a slide with the wretched FANYA exchange added extra downward impetus to the chief metal suffering from that debacle, such as Antimony, Bismuth and Indium.
Those who can recall 1999 and the end of the last decade of the last century will recall it wasn’t a happy time for commodities. The Tech Boom was sucking the life out of the prices of everything from oil to copper. The rest is history for Tech had its own denouement in 2000 and mining never looked back. In fact, even 2008 was not as bad for prices of metals as the late 1990s had been. It was just that miners had let their costs get out of whack during eth “good times” of the early Commodities Supercycle.
The one phenomenon that paralleled the Supercycle was the rise of the “Rockstar traders”. There were traders before and had been for hundreds of years, but this time they had become almost household names.
Now is somewhat similar. The removal of one or more traders should not do much damage to the industry (though it could to their lenders). It would certainly free up some of the market share that has been overly concentrated.
What is clearly needed is not just an improvement or stabilization in China but also a rebalancing towards the non-Asian economies, and by this we mean the West and developed Asia, rather than just the fairly battered emerging markets. Somehow the oil price slump should start working through to a broader range of economies that have been beggared by high energy prices and China ravaging their industry over the last 15 years. When that rebalancing takes place, then finally the dangerous China-centric mindset that has held miners and traders in its thrall since 2000 will be broken.
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>