As a result of falling copper prices, major copper miners like Freeport-McMoRan (FCX), Glencore (GLEN), and Anglo American (AAUKY) have declared mine shutdowns and production cuts in the past two months. Given that 45% of copper demand comes from China, the slowdown in the Chinese economy offset the boost from production cuts on copper prices.
As the above graph shows, production cuts and mine shutdowns by Freeport, Glencore, and Anglo American supported the weak copper prices, but they were unsuccessful in triggering a bull run. Freeport-McMoRan was the first major miner to announce production cuts after copper tumbled to a six-year low on August 24.
First rally by Freeport
Freeport’s production cuts gave an initial boost to copper prices, which were later supported by Glencore’s 400,000-ton copper production cut. However, this bullish rally was stopped by the FOMC (Federal Open Market Committee) meeting in which the Fed said that the weak Chinese economy was the reason it postponed the interest rate hike. This brought the copper demand concerns from China to center stage and sparked a fall in copper prices.
Second rally by Collahuasi mine
The second positive rally was initiated by the closure of the Collahuasi mine by Glencore and Anglo American just before the start of the Chinese Golden Week holiday. This bullish rally was supported by the absence of Chinese players and also the short covering at the end of the third quarter. But the momentum fell after the re-entry of Chinese traders after Golden Week and then the release of Chinese GDP on October 18.
Considering the copper price trends, it seems that the production cuts only gave support to falling copper prices. China’s disappointing macroeconomic releases, which include industrial profits data, consumer price index (or CPI), and gross domestic product (or GDP) stopped the positive price swings initiated by the production cuts. Any positive signal from China regarding the increase in base metal demand and economic reforms could initiate a positive rally in the copper prices. This can support the falling mining stocks and base metal ETFs like the PowerShares DB Base Metals Fund (DBB) and the SPDR S&P Metals & Mining ETF (XME).