Cuts in Production Too Slow: Analysts

Cuts in production too slow: analysts 
 
MINING companies are not cutting production quickly enough to bring a fast recovery in metals prices and the industry's collective 'wait and see' approach could actually be delaying a turnaround, according to one research house.

Brokerage Inteq says the fall in metal prices below the marginal cost of production shows no signs of reversing as it requires large cuts to production rates that are not yet forthcoming.

Some estimates suggest half of aluminium capacity is running at a loss, as is a third of nickel production.

Analysts from the London-based company said it was clear in aluminium and nickel, for instance, the number of loss-making operations was not confined to a small number of marginal producers but rather a significant portion of world capacity.

'An interesting dilemma for producers ' not everyone making losses needs to cut production to bring the market back to balance, but who should cut and who waits for the free ride?' the analysts asked.

So far, production cuts were reactive and were a case of 'too little and too late', Inteq said, leaving the market in surplus.

And as long as the markets were in surplus, there was no reason why metal prices would not continue to trade below the marginal cost of production.

'As long as major mining companies are willing to and can afford to carry losses in some divisions, we believe base metal prices could continue to trade well below the cost of supply,' the company added.

So far, Inteq said only about 1% of global production in copper had been cut, while in nickel only about 5% of global production had been shut down.

In zinc, cuts so far revealed would come to 3%, while in aluminium cuts were around 8-10%.

In ferrochrome, announced cuts come to 34% of capacity.

Inteq focused on the ferrochrome cuts, noting that ferrochrome, like nickel, is used in the stainless steel industry primarily ' but even with 35% cuts in capacity, the ferrochrome price has stayed relatively low.

Instead, analysts at the company said the ferrochrome cuts should give pause to nickel producers, also heavily exposed to stainless steel.

The exposure of stainless steel demand to consumer goods such as electronics and appliances (18% of stainless steel demand) and automotive uses (15% of demand) suggested end-user demand for other base metals could fall by as much as with ferrochrome.

'Either the ferrochrome market is set for a very sharp rebound, or far larger cuts are needed in other metal markets,' the brokerage added.

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