COLUMN-A bright future but a stormy present for copper producers: Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Andy Home

LONDON, April 11 (Reuters) - "In copper we trust".

Such was the title of the presentation given by Jerry Jiao, vice president at China's Minmetals Group, at last week's CRU-CESCO conference in Chile.

Jiao looked beyond the current sharp braking in Chinese demand growth, "an adjustment rather than big trouble", to paint a bright future for copper usage in the country as its economy moves towards a more consumerist model.

The theme was taken up by Robert Friedland, chairman and founder of Ivanhoe Mines (Toronto: IVN.TO - news) , who was in typical evangelical form about copper's prospects as the world embraces greener technology. nL2N1791V1

"As soon as you go green, you have an explosion in demand."

The problem for the copper industry executives meeting in Chile last week, however, is not the bright future but the stormy present.

A first-quarter rally, which lifted the London Metal Exchange price to $5,131 per tonne, has fizzled out and three-month metal ended the week looking battered and bruised at $4,650.

SUPPLY CUTS - TOMORROW BUT NOT TODAY

Minmetal's Jiao might be forgiven for taking an optimistic view of copper demand.

After all, Minmetal's listed arm, MMG (HKSE: 1208-OL.HK - news) , is in the process of bringing on stream the new Las Bambas copper mine in Peru.

It (Other OTC: ITGL - news) is just one of many projects planned and commissioned during the heady years of the super-cycle and now contributing to a particularly vicious down cycle of fading demand and rising supply.

If attendees at last week's industry meeting in Santiago were hoping for more production cutback announcements they were disappointed.

Producers such as Chile's state-owned Codelco, Antofagasta (LSE: ANTO.L - news) and Mantos Copper all banged the producer drum of cutting costs but not actual production. nL2N1790E3

It is this lack of supply response that is pressuring copper prices but with everyone slashing costs the real producer pain hasn't yet really kicked in.

Perhaps the most bullish supply-side news at last week's event was the cancellation of Chilean copper organisation CESCO's exploration conference on the Monday.

The lack of interest is symptomatic of the collapse in project development, Friedland's Ivanhoe excepted.

The man who brought the world such mines as Voisey's Bay in Canada and Oyu Tolgoi in Mongolia, is currently working on another giant prospect, Kamoa in the Democratic Republic of Congo.

Just about everyone else, though, has slammed the brakes on their exploration and development activities.

That, in time, will generate its own up-cycle in prices.

We've been here before.

It was the collective failure by copper producers to anticipate the surge in Chinese demand growth of the last decade that contributed to the stratospheric rise in price to over $10,000 per tonne in 2011.

And such is the severity of the downturn in planning for the next generation of copper mines that the market will rebalance even under the most pessimistic of demand scenarios, according to CRU senior consultant, Matthew Wonnacott.

But only in the year 2020.

TRADING "RUMOURS, HEARSAY AND ANECDOTES"

With (Other OTC: WWTH - news) little in the way of supply response to current depressed prices, the market is collectively trying to second-guess the speed and scale of the Chinese demand slowdown.

The exercise is not helped by the increasingly erratic behaviour of key Chinese economic figures.

The confusion runs all the way from the broadest of measures such as GDP to sectoral specifics such as construction.

Noting the apparent contradiction between positive construction metrics and secondary indicators in the first two months of 2016, Wonnacott noted wrily that China seems to have found a way of building without using either steel or cement.

One of the resulting problems from such statistical confusion, he added, was that the market is left trading "rumours, hearsay and anecdotes".

A comment that particularly applies right now to the level of Chinese copper stocks.

Those registered with the Shanghai Futures Exchange have mushroomed so far this year, while those lying in the more opaque bonded warehouse system are also now rising again.

Is this metal all locked down in financing deals, as suggested by Minmetal's Jiao, who described such stock as "no longer just copper" but part of China's financial system?

Or might some of it spill out into the rest of the global market, as suggested by reports last week that Chinese smelters might themselves start exporting in the face of weak domestic demand? nL3N16W1ZZ

Answers on a postcard.

But what everyone agrees is that there is no current demand replacement for China. Other emerging countries such as India might get there in time but right now China remains the only copper game in town.

THE NEW GLOOMY CONSENSUS

And everyone seems to agree that with Chinese demand losing much of its sparkle the price must go down before it goes up.

It totally fit the downbeat mood of the conference that it actually rained on Tuesday, an unusual event in a city that averages just one day of rain per month over the December-March period.

The logic for lower prices is strong.

In an oversupplied market more production must exit and it will not exit until it is forced to do so.

As producers have slashed costs, the global cost curve has fallen steeply. At current prices only the most financially vulnerable of producers have had to pull down the shutters.

The price, it follows, must travel further into the cost curve for a sizeable supply response to materialise.

When Goldman Sachs last year forecast the price would hit $4,500 by the end of 2016, it was deemed a super-bear.

Goldman's analyst Max Layton reiterated the reasons for the bank's prognosis last week but he is no longer the sole super-bear.

Many others have followed him downwards in the intervening period with much talk of prices bottoming out in the low $4,000s at last week's meeting.

Contrarians were in noticeable short supply.

The new consensus, it seems, is for more rainy days in Santiago and other copper production centres.

But the problem with any sort of price consensus is that it is all too often wrong. Copper producers are now living with the fall-out from the collapse of the old consensus, which was that Chinese industrialisation would march unrelentingly onwards.

That, we now know, is not how things panned out.

The only question with the new consensus is whether it is too low or, gulp, still too high. (Editing by Greg Mahlich)