Forward copper flips into backwardation as mine closures bite

By Josephine Mason

NEW YORK (Reuters) - Prices for far forward copper futures flipped into backwardation last week as expectations mounted that big mine closures will tighten global supplies, boosting prices by the end of next year despite lingering worries about China's appetite for metal.

Following news on Sept. 7 that Glencore Plc (GLEN.L) will shutter two big copper mines, traders have been buying contracts for delivery in December 2016 and selling futures for a year later (MCUZ7), betting that production cuts will quicken.

On the day of the Glencore announcement, far forward copper charts showed a $10 (6.4 pounds) contango for the Dec 2016-Dec 2017 spread. The began to narrow, and last week it moved into a backwardation.

"Someone's borrowing the Dec 2016-Dec 2017 spread in anticipation of a deficit," said a London-based trader.

The move will remove 2 percent of world supply from the market, the first meaningful supply shock since the start of the market's year-long rout many analysts say is need to revitalise copper prices languishing at six-year lows.

"Glencore's doing the right thing on the supply side, but it'll take a while to feed through. But the demand side is equally important," said a London-based trader.

The forward buying reflects expectations that sinking cash prices will carve deeper into producers' margins, forcing them to implement even steeper production cuts.

Prices will bottom out if another 500,000 tonnes of "strategic curtailments" similar to Glencore's are announced, Bank of America Merrill Lynch analysts said in a note on Friday.

Earlier this week, prices jumped to two-month highs on Wednesday after a powerful earthquake struck off the coast of Chile, the world's top producer, temporarily closing two big mines. The gains were short-lived though as the operations reopened within 12 hours.

On Friday, three-month prices sank 2.5 percent to $5,253 per tonne as worries reemerged over demand from China, the world's top consumer of industrial material, offsetting concerns about depleting mine supply.

Analysts estimate between 1 million and 1.5 million tonnes of mine output has been lost this year to drought, floods, power outages and falling ore grades from Papua New Guinea to Zambia and Chile.

(Reporting by Josephine Mason; Editing by David Gregorio)