News Analysis: Metal producers slash production amid price slump

Chinese metal producers are cutting production as falling global commodity prices exacerbate weak domestic and international demand.

On Wednesday, six major steel mills issued a joint statement saying they will cut the production of 200-series stainless steel by 30 percent starting in December. They also suggested that the government suspend approvals for new production capacity.

On Tuesday, 10 copper smelters announced they will cut production by 350,000 tonnes next year, beating the market estimate of 200,000 tonnes. The reduction accounts for 8.75 percent of China's copper production this year.

Last month, producers of zinc and nickel also resorted to collective production cuts.

Globally, commodity prices have floundered due to oversupply, tepid demand and expectations of a possible rate hike this month in the United States. Commodity prices typically drop when the U.S. dollar strengthens against other currencies.

The Bloomberg Commodity Index, composed of 22 commodity futures in seven sectors, hit a 16-year low of 80.19 on Nov. 23. The CRU global steel price index has dropped 26 percent to 118.7 year to date. The London Metal Exchange copper price has fallen about 27 percent since the beginning of the year to below the psychological mark of 5,000 U.S. dollars per tonne. Goldman Sachs estimated copper won't rise above 5,500 dollars for another five years.

Global commodity prices soared with China's building boom, but this demand-driven surge has lost steam amid the slowing Chinese economy, which grew 6.9 percent in the first three quarters of the year, a far cry from the double-digit growth seen in previous decades.

China's manufacturing PMI, an index for factory activity, hit a 39-month low in November, suggesting prolonged contraction and sluggish demand.

"The slowdown in Chinese demand has already created substantial oversupply in some commodities, including iron ore and aluminum, and we expect this trend to continue in 2016 as the Chinese economy undergoes a gradual deleveraging and transition from investment to consumer-led growth," according to Fitch Ratings.

Average prices for these two commodities are likely to be lower in 2016, as are prices for copper and zinc, according to Fitch. "Nickel could prove an exception to the trend, due to mine closures and falling Chinese nickel pig iron production, but this is far from certain."

Collapsing commodity prices have placed a significant strain on credit quality in the oil and gas and metals and mining sectors, Moody's said.

These sectors have accounted for a disproportionately large 36 percent of downgrades and 48 percent of defaults among all corporations globally so far this year, Moody's said.

Moody's anticipates continued credit deterioration and a spike in defaults in the sectors in 2016. Endi