Mine closures bolster metals prices as demand collapses

Supply cuts affecting about a fifth of the global mining industry have offset a collapse in demand due to the coronavirus outbreak, bolstering prices that have been hit hard in the past month.

About 15 per cent of the world’s copper mines, and 20 per cent of zinc mines, are now offline or operating at reduced capacity, according to UBS analysts who say disruptions could stop industrial metals from plumbing the depths seen during the global financial crisis.

In 2008, copper sank below $3,000 a tonne, whereas now it trades close to $4,500. Zinc and aluminium prices are also well above their 2008 nadirs.

“The duration, and therefore the total amount of lost supply in 2020 is unclear, but in our view increasing supply disruption will act as an important offset to demand weakness, potentially limiting commodity price downside,” said analyst Daniel Major from UBS. 

Mexico became the latest country to impose restrictions on the mining industry, when it ordered last week the closure of non-essential businesses until the end of April. The country accounts for 3 per cent of global copper production, and 6 per cent of zinc production. 

Analysts expect supply disruptions to increase over the next month as governments impose tighter restrictions to halt the spread of the deadly virus, while producers halt mining at marginal operations in an effort to preserve cash. Copper has fallen 20 per cent this year, while zinc and aluminium are both down 18 per cent.

But supply is still likely to outstrip demand, setting up a challenging year for the metals and mining industry.

“The demand destruction of 156,000 of copper per week far outweighs the current 60,000 of Covid-19-related supply disruptions,” said Tyler Broda, an analyst at RBC Capital Markets. “Metals like aluminium, where it is costly to shut down production, face an even worse dynamic.”

If the global economy contracts 1.9 per cent in 2020, Morgan Stanley estimates that demand for aluminium, which counts the car industry as one of its biggest consumers, will fall almost 12 per cent. That would generate “an inventory overhang that could depress price for several years”, said analyst Susan Bates from the bank.

However, some of the most pessimistic demand scenarios may not materialise.

China, the world’s biggest consumer of industrial metals, is returning to normal and an infrastructure-led recovery could help mitigate the worst effects of the economic downturn in the rest of the world. Lower collections of scrap metal could also help support prices.

“In addition, the rapid global policy response already seen, and possible additional measures — such as the $2tn proposed infrastructure package in the US — could drive a more rapid upturn in metals demand and prices than broader [economic] growth suggests,” said Ms Bates.

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