Copper price has fallen to lowest level since the financial crisis of 2008/09. Copper CFD, which is closely linked to price of comex copper is currently trading at $2.07/Pound.

At a time like this, it is vital to understand two key points 

• How far the bear market might stretch and from where the next bull cycle might begin.

In spite of heavy financialization of metals in wake of easier monetary policies across globe, we expect over time, supply demand will prevail in the market. Return from commodities have worsen, after US Federal reserve indicated reversal of its expanding policy but only gradually and Chinese demand started slowing down from 2011.

In previous article, we discussed on who are the giants in copper production - top 10 producers such as Codelco, BHP Billiton, Rio Tinto, Freeport McMoran who produces almost 50% of global supply.

In this article we discuss, why major supply drop/disruption unlikely, in spite of recent production cut.

Lower price is adding pressure to high cost small producers', larger players like Glencore has announced 400,000 tons cut in production phased out over next year or so.

However, this type production cut unlikely to be enough to push prices higher.

Cutting unprofitable production 

Companies are reducing production of high cost mines. Production cost of Glencore's African mines are around $2.5/pound, way above current price. So the strategy is to reduce production from high cost mines gradually and make these mines more efficient along the way. Glencore is planning to reduce cost of production to $1.7/pound in those same African mines. That is a massive reduction.

It is debatable that with resistance from the government and local trade unions, whether such production cut is achievable, nevertheless it shows to how extent the costs can be reduced, which brings us to reason 2.

No oligopoly but production efficiency 

While high cost producers suffer, lower price is an opportunity for efficient producers to grab greater market share. Moreover Top 10 giants in Copper business still have enough margin to continue production. So with current level of margin, ranging from 40-80 cents/pound, oligopoly is unlikely. It is more likely that companies will wage war against cost, which are evident in their annual and quarterly report.

According to Reuters, average cost reduction in 2014, was in tune of 15 cents/pound, however that number could be far greater in 2015, especially with earlier actions bearing fruits. Cost of production could drop in tune of 15-35% this year.

First Quantum Minerals, among the 10 largest copper producer has pushed cost to $1.18/pound in the third quarter of 2015.

Copper giant, Chilean state owned Codelco, aid they are not looking to reduce production but cost. BHP Billiton and Rio sounded similar in line.

With such an outlook, it would not be unwise to expect that supply overhand is here to stay for longer if demand fails to recover.

According to our expectations at FxWirePro, Copper price is likely to drop towards at least $1.87/pound and further weakness in China could push prices towards $1.49/pound next year. However any drop below $1.35/pound is unlikely to sustain.