NEW DELHI—With an interest-rate increase from the U.S. Federal Reserve out of the way, battered metals investors are returning their focus to China, where plans to trim a supply glut have sparked hopes for a rebound in prices in 2016.
Prices of aluminum and copper—the world’s two most actively traded metals—are trading up 6% and 5%, respectively, from recent multiyear lows. Uncertainty about the Fed’s move and its impact on the U.S. dollar helped to keep a lid on metals prices ahead of the central bank’s announcement. Most commodities are priced in U.S. dollars.
But analysts say it is too early to declare a complete recovery and prices remain low by historical standards. Three-month aluminum futures on the London Metal Exchange are currently at $1,515 per metric ton, while copper is at $4,660 a ton.
“We expect to see some fundamental recovery only by second quarter next year,” said Helen Lau, an analyst with Argonaut Securities.
Some of the mild uplift is due in part to measures recently unveiled by China that aim to cut overcapacity in sectors such as steel.
Chinese consolidation is likely to come in two forms. First, China has said it will merge state-owned companies in the sector.
“We expect China will enforce its supply-side reforms through 2016 and speed up industry consolidation in steel and other energy-intensive sectors,” Ms. Lau said. Earlier in December, China’s state-assets regulator saidminer and metals trader China Minmetals Corp. would take over mine contractor Metallurgical Corp. of China.
Consolidation will also come with production cutbacks or closures. Chinese aluminum, copper and nickel producers have all unveiled plans for production cuts over the next few months.
Specifically, copper and nickel producers said last month that they would cut output by 5% and 15%, respectively, next year. And China’s top 14 aluminum companies say they won’t restart production that has already been shut down and won’t begin production at any new smelters next year.
A recent Citi report said more Chinese steel mills are expected to close after the Lunar New Year holiday. The report added that the aluminum market may take a longer time to balance.
“On the consolidation side, we don’t expect to see immediate shutdowns. That should happen in months, but the progress will be faster than in previous years,” Ms Lau said. “We expect demand recovery will be gradual.”
Jiming Zou, a Shanghai-based vice president at Moody’s Investors Service, estimated that about 50% to 60% of Chinese steel companies are loss-making.
“So far this year their operating cash flow has been just enough to pay back interest on loans. The cash flow will not be enough to pay interest on loans for many companies next year,” he said.
China’s total steel production this year will be about 800 million tons, while the demand will be around 710 million tons, Mr. Zou estimated.
The benefits to metals prices from the announcements about production cuts have so far been limited. Market observers aren’t sure if Chinese producers will move slowly with planned output cuts because they believe prices will start rising and their operations will become profitable again.
Chinese producers of certain metals—including aluminum and steel—have recently stepped up exports as domestic consumption slowed, which has also suppressed prices. Producers have also been slow to cut production to prevent job losses.
Casper Burgering, an analyst with ABN-Amro, said in a report that 2016 “will not be such a disastrous year as 2015.” International metals producers such as Glencore PLC and Alcoa Inc. have also announced significant output cutbacks.
“The global supply-demand balance for copper, nickel and zinc is expected to improve, while oversupply will continue to set the tone for the aluminum price during 2016,” Mr. Burgering said.
Courtesy : WSJ
