Cut supply or face stagnation, Mac Bank says

A widespread cut in production is needed if the mining industry is to grow financially, according to Macquarie Bank.

It comes amidst continued low prices in major commodities such as coal and iron ore, as the sector stagnates economically due to a slump in demand from China.

"Demand growth is now extremely stagnant. As a result, demand is only growing into installed capacity very, very slowly. The only thing that will now close the balance is supply cuts," the bank said in a research note.

These comments echo those of Glencore CEO Ivan Glasenberg and Deloitte.

Earlier this year Deloitte stated that a greater control over supply was needed in order to turn around the current period of correction.

Glasenberg has been heavily critical of miners, stating many do not understand the supply and demand market.

Speaking at the company’s annual general meeting in Switzerland, Glasenberg blamed falling commodity prices on overproduction by other mining houses.

"Unfortunately our competitors in the world have produced more supply than demand and commodity prices are down for that reason," he said.

"I'm doing my level best to convince my competitors that we should understand demand and supply.”

Staying true to his word, Glasenberg decided to cut the company’s Australian coal production by 15 per cent or 15 million tonnes earlier this year.

“We don’t want to be the ones forcing the price down with oversupply,” he said at the time.

In Macquarie Bank’s research notes, it stated that supply cuts, for the most part, have been non-existent.

“In a world of cheap money, not only is it cheaper to fund new capacity, but it is also easier to keep existing marginal assets going. Essentially, we have not let conventional economics work in this cycle — we simply have not seen enough hard decisions made by company boards or bankruptcies of uneconomic capacity," the bank said.

“Prices are coming off because we see massive expansions coming there from our major competitors,” Glasenberg said.

“They continue to expand these brownfields and put more supply into the market.

“We've always been wanting to keep building and keep putting the cash which we generate into new assets. That's what we've got to stop doing as a mining industry. We've got to learn about demand and supply.”

The Bank added: "All in all, it looks like a time when things have to get worse before they get better.”

“Given the demand environment, appropriate (and permanent) supply cuts are one of the few things that would make us more positive on metals and bulk commodity prices.”

However, some miners in the iron ore space have taken note.

Yesterday Vale announced it was cutting 25 million tonnes, or around 7 per cent, of its global iron ore production.

Vale’s executive director, Peter Poppinga, says the decision is based on predictions that the iron ore market will remain oversupplied into 2016.

However, even with the production cuts, Vale says it still aims to produce 340 million tonnes of iron ore in 2015.

This means the 25 million tonnes it stops producing will be replaced by low-cost supply- a move which could trigger the further collapse of iron ore prices.

Macquarie Bank forecasted the likelihood of continued weak prices in the market unless miners removed overall production.

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