TORONTO (miningweekly.com) – Despite prices having rallied recently, copper has not yet broken out of a multiyear bear market, a Bank of America (BofA) Merrill Lynch Global Research report released on Friday has found.

According to the report, copper prices had been falling since 2011 and, in reaction, miners had implemented various measures to cope with the challenging operating environment, including capital expenditure (capex) cuts and cost reductions.

Yet, outright production curtailments, the most effective measure to rebalance oversupplied markets, had been few and far between. “As such, we forecast surpluses all the way to 2018 at present. This dynamic is one of the reasons sentiment towards copper has shifted completely. A couple of years ago, most market participants believed copper would flip back into deficit soon. Meanwhile, on our recent trip to the US and Canada, virtually every investor we met had been bearish,” BofA Merrill Lynch analysts stated.

Against this bearish backdrop, the banking group noted that prices had rebounded in recent weeks. A rally through the second half of 2015 had been analysts’ base case, on the view that Chinese demand would stabilise after a terrible 12 months.

The report noted that while stocks at bonded warehouses had now fallen significantly and import premiums had moved higher, underlying consumption growth still remained muted.

Domestic premiums had also dropped and reported inventories on the Shanghai Futures Exchange had risen.

“Putting it all together, we see scope for a continued stabilisation in China, but we do not believe this will be sufficient to take copper out of the bear market. It is also worth noting that our forward-looking metal business cycle indicator has continued to deteriorate. In addition, metals fell on the back of the delayed federal rate hike, suggesting market participants are concerned about global growth,” BofA advised.

Switching to supply and acknowledging the challenging operating environment, mining giants Freeport-McMoRan and Glencore recently became the first companies to announce production cuts. Given the size, Glencore’s curtailments, in particular, had caught the market’s attention.

“Yet, incorporating these cuts into our supply and demand model and maintaining a 6%/1.3-million tonne disruption allowance, we still expect a 280 000 t refined surplus in 2016. Hence, we believe at least 500 000 t of additional strategic cuts (in other words, not output losses owing to strikes or bad weather) are necessary to rebalance the market.”

While several mines and companies were candidates for closures, especially in the Americas, Asia and Africa, further production discipline would in all likelihood only emerge in reaction to additional price declines, BofA said.

The research analyst reinforced the view that copper would fall to at least $4 400/t ($2/lb) in 2016.

“If and when more supply discipline emerges, we would become more constructive on copper,” BofA noted.