* Hedging when prices surged gave lifeline to struggling
mines
* Some mines reluctant to halt due to high closure costs
* Chinese state-owned mines remain open to retain jobs
By Eric Onstad
LONDON, Oct 21 (Reuters) - Base metal mines dipping into the
red are proving unexpectedly resilient against output cuts,
which is likely to prolong and deepen already weak prices.
Some mines are resisting cuts in production by hedging when
prices pop higher, others are absorbing losses because shutdown
costs are even steeper, while fear of painful job losses is
keeping still other loss-making operations alive.
The London Metal Exchange index of its six main base metals
.LMEX has shed a fifth of its value over the past 12 months.
In some metals, such as nickel, about half of capacity is
loss making after the rout on commodity markets, largely due to
fears about slower growth in top metals consumer China.
"Given that so many nickel mines are out-of-the-money, we
should reasonably expect to see a large supply-side response,"
said analyst Joel Crane at Morgan Stanley (N:MS).
"Instead, nickel miners are holding fast."
While a clutch of production shutdowns have resulted in
headlines and prompted price rallies, most base metals are
expected to remain in a supply/demand surplus this year and
next, Reuters polls showed last week. MET/POLL
Commodity trader and miner Glencore GLEN.L has been the
most prominent among the major mining groups to cut output,
including of zinc, which spurred a strong rally.
HEDGING LIFELINE
Many miners took advantage of the rally, however, to lock in
prices, Macquarie analyst Vivienne Lloyd said.
"After the zinc announcement there was a strong rally...
however, and we note that (price) ceilings began to form amid a
bout of producer hedging."
In aluminium, many smaller producers with costs of $1,800 to
$1,900 a tonne are likely to have locked in prices a year ago
when prices were around $2,000, giving them breathing space even
during the bear market, an executive of Rural 0486.HK said.
Benchmark aluminium CMAL3 is now around $1,535 a tonne.
"The question really... is how long can they hang on,
waiting for someone else to cut so that prices respond so that
they can survive a bit longer," Steve Hodgson, chief executive
of marketing for Russia's Rusal, told Reuters.
In some cases, the costs of shutting down are so high that
producers prefer to endure losses, hoping for a price rebound.
In the nickel sector, PAL (pressure acid leach) operations
has seen strong production growth over the past decade, but
temporary closures and restarts of the complex facilities are
"prohibitively high", Crane said.
"Such assets are unlikely to be cut from the market, unless
nickel's price is expected to remain sustainably at low levels,"
he said in note.
In China, despite the rise of a private sector that will
shut down loss-making capacity, there is still government
pressure to prop up bleeding enterprises to maintain employment.
Arnoud Balhuizen, president of the marketing unit of BHP
Billiton BHP.AX BLT.L , said there was "sticky" mining
capacity in China, seemingly impervious to red ink.
Balhuizen was referring to the iron ore sector, but the same
issue applies to base metals such as aluminium, analysts said.