LONDON Jan 5 Sucessive annual cuts in mining
exploration bugets 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
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 programmes.
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 cancelled 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
towards 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 incentivises 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 tonne 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
devlopment, 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 galvanise steel, which surged to nine-year highs
near $3,000 a tonne in November.
(Reporting by Pratima Desai; Editing by Veronica Brown and