FROM scrap dealers in the rich world to wild-cat miners in Africa, the ripple effects of slowing demand for metals in China are being felt far and wide. But few have been hit as hard as Glencore, a debt-laden Anglo-Swiss miner and trader. On September 28th its shares fell by almost a third, despite the firm’s attempt to buttress its balance-sheet a few weeks earlier by raising $2.5 billion of equity and suspending the dividend. Shares of Anglo-American, a London-based mining firm more exposed to platinum than copper, also took a beating. Glencore’s shares have fallen to a sixth their level at its listing in 2011. There is even talk of taking the firm private again—although financing such a step would be tricky.
The trigger was a note from Investec, an investment firm, speculating that if weak prices persist, their earnings would be consumed by debt repayments and servicing, eventually wiping out the value of their share capital. It noted that the biggest global miners, Rio Tinto and BHP Billiton, though less indebted, were also likely to see rising debt ratios if prices remained low, which might require dividend suspensions and asset disposals such as those Glencore is pursuing. It said the industry had “gorged” on cheap debt during the China-led metals boom of recent years. Now it is paying the price.
The sharp slowdown in industrial activity in China is disastrous for copper producers, since China consumes 45% of their output. Its attempt to shift from an investment-led economy to a consumer one has raised fears of a structural decline in the amount of copper it will need. However much electrical wiring there is in consumer goods, it does not match the vast tonnages consumed during the recent decades of rapid urbanisation in the form of power lines, telecommunications cables and the wiring of big apartment complexes.
Estimates of short-term Chinese copper demand vary. Deutsche Bank reckons it will grow by 3% a year on average over the next five years, down from 7.5% over the past five. Goldman Sachs takes a particularly bearish view, saying Chinese copper consumption will not grow at all this year and next.
A building problem
One of the recent disappointments has been the roll out of electricity infrastructure in inland Chinese cities where investment was expected to surge this year. Analysts at BHP say such infrastructure accounts for the biggest share of copper consumption in China, more even than the construction industry. Yet a corruption crackdown at state-run energy companies slowed the grid-laying projects during the first half of the year, analysts say. Unless the infrastructure spending picks up again, as some expect, construction is the main fallback. But whereas cement and steel rods dominate the early phases of a construction cycle, copper comes in at the end, providing a building’s wires, pipes and air-conditioning systems, as well as home appliances. In China, housing completions have plummeted by 15% so far this year, worse than housing starts, according to Goldman Sachs. 
Alongside industrial attrition, copper has been under speculative attack in China too. Chinese hedge funds, dissuaded by the government from “rumour-mongering” about stocks, have launched sporadic “bear raids” on copper as a proxy for betting against China’s economy. Kenneth Hoffman, a copper specialist at Bloomberg Intelligence, a data firm, describes the size and power of these firms as “chilling”.
Yet the outlook for China is not all bearish. As incomes increase, the “intensity” of copper use is likely to grow. China is still well short of the average-income level at which demand peaked in Japan, for instance. Nascent industries such as wind and solar power and electric vehicles, all of which are copper intensive, may also boost future demand.
In the meantime, supply needs to fall to balance the market. After a brief rally, copper traders shrugged off Glencore’s announcement last month that it was suspending operations at mines in Zambia and the Democratic Republic of Congo that produce 400,000 tonnes a year, or about 2% of global output. That left people wondering whether more cutbacks were needed.
Some estimate that the industry is producing about 500,000 tonnes of excess copper a year. Eleni Joannides of Wood Mackenzie, a research firm, expects that by the end of the year global copper stocks will amount to 80 days of average consumption, higher than during the 2008-09 global financial crisis. That will get worse: it takes several years to build a mine, so several firms were caught out when the market turned. As a result big new increments of supply have hit the market in the last year or two, just at the wrong time. Stocks will not peak, Ms Joannides believes, until 2017.
Glencore is not the only global miner to respond by cutting production. Wood Mackenzie’s Ms Joannides says mines producing a further 170,000 tonnes a year have been idled so far this year. But only the most expensive supplies are being removed from the market. Many firms, helped by falling currencies in countries like Chile and Peru, are instead slashing costs to keep production going.
The industry’s fragmentation makes it unlikely that producers will agree to rein in output. Goldman Sachs notes that the iron-ore producers continue to increase production, even though four of them control 65% of the world’s output; in copper the top five producers have only a third of the market. In some cases, it is cheaper over the long run to keep mines running at a loss to maintain security and retain staff, rather than to close them down.
Yet within a few years, many analysts expect the natural constraints of copper production to put a floor under prices. The quality of ore in copper mines has decreased during the boom. Water shortages make copper more expensive to extract. Mine depletion in Chile and Peru has driven companies towards new deposits laced with arsenic that require costly cleaning. And workers and environmentalists increasingly raise their voices against lousy pay and conditions.
Higher costs make it less likely copper production will increase, which should help stabilise the market. Chinese demand may also be supplemented by growth in other emerging markets, such as India, which consumes just 2% of the world’s copper. The challenge for the big diggers like Glencore is to hold out until then.