Copper, Aluminum Need `Severe' Cuts, Investec's Cheveley Says

By Claudia Carpenter

Nov. 7 (Bloomberg) -- Copper and aluminum producers need to make ``severe'' cutbacks to prevent supplies from overwhelming demand as customers cancel orders amid a global economic slowdown, said George Cheveley, a fund manager at Investec Asset Management Ltd.

Aluminum supplies may exceed usage by 1 million metric tons next year unless output is reduced, Cheveley said in an interview yesterday in London. The price of copper may have to fall to $3,000 a ton, or 23 percent below its current level, before mining companies are forced to reduce supplies to match demand, he said.

They ``need severe cutbacks to move into balance in the short term,'' said Cheveley, who helps manage $200 million of natural-resource stocks and commodities at Investec. Aluminum ``is in a massive surplus right now. I think copper can go significantly lower before there will be enough reaction by the industry.''

Rio Tinto Group, United Co. Rusal and Cia. Vale do Rio Doce are among mining companies cutting production of industrial metals after commodity prices plunged. Copper miners have cut 151,000 tons of production for 2009, equal to about 1 percent of 2008 output, Barclays Capital said yesterday. Aluminum cutbacks are equal to about 5 percent of production, Barclays said.

``Demand has fallen rapidly since September,'' said Cheveley, a former BHP Billiton Ltd. analyst. ``Some customers are canceling orders and some are deferring them. This process of destocking is greater than the last recession because cash is so tight.''

Metal Stockpiles

Copper miners may maintain production and stockpile unsold metal. Aluminum smelters in China, the world's largest producer of the metal, are seeking export tax rebates to ship more metal out of the country, Cheveley said.

``If that happens, it will be even worse'' for the aluminum industry, he said.

Tin is the only industrial metal that will have a supply deficit next year, Cheveley said. Still, a turnaround in demand may be quicker than in previous cycles because of rapid declines in inventories held by manufacturers, Cheveley said.

``Once the manufacturers have finished destocking, their orders will have to increase,'' he said.

To contact the reporter on this story: Claudia Carpenter in London at ccarpenter2@bloomberg.net or ccarpenter2@bloomberg.net