Mine strikes to feed copper deficit, buoy prices

LONDON Thu Aug 4, 2011 11:38am BST

Striking workers from Chile's Escondida copper mine march through the streets of Antofagasta, north of Santiago, July 28, 2011. REUTERS/Moises Avila

Striking workers from Chile's Escondida copper mine march through the streets of Antofagasta, north of Santiago, July 28, 2011.

Credit: Reuters/Moises Avila

Related Topics

Quotes

   

LONDON (Reuters) - An unusually high level of strikes and weather-related stoppages at copper mines mean supplies of the key industrial metal this year are likely to stagnate, which could contribute to a deficit and sustain prices even if economic slowdown hits demand.

At the start of each year analysts make an allowance for the amount of copper expected to be lost to disruptions such as the strike action in recent weeks in Chile, the world's largest copper producer.

The global figure they projected for the whole of 2011 is clearly on the way to being exceeded.

In Chile, the spotlight is on a conflict over bonuses between workers and mine owner BHP Billiton (BHP.AX) (BLT.L) at the giant Escondida mine, expected to account for more than 5 percent of global copper production this year.

"Mine workers seeing high copper prices, seeing miners making a lot of money, want their slice of the cake," said Christine Meilton, analyst at CRU Group. CRU now estimates mined copper production at 15.9 million tonnes for this year compared with 16.1 million tonnes in January.

"Our disruption allowance in January was 7.5 percent for mined copper. That's not going to be nearly quite enough, it's looking more like 8 to 9 percent," Meilton said.

A rare winter storm recently hit several mines in Chile, including Escondida and Collahuasi, the world's third-largest copper mine, adding to production losses.

According to the International Copper Study Group, world mine production last year totalled 16.1 million tonnes.

Benchmark copper prices on the London Metal Exchange hit a record high of $10,190 a tonne in February as investors piled in, seeking an inflation hedge that would also potentially yield high returns because of shortages.

Prices of the metal used widely in power and construction have since slipped to around $9,560 a tonne.

However, a Reuters survey of analysts last month, carried out before the full extent of the latest mine disruption was clear, suggested copper would average $9,570 a tonne this year and $9,995 in 2012. The consensus for the deficit this year was 343,150 tonnes.

"Copper is trading on tight supply/demand fundamentals," said David Hemming, a portfolio manager at Hermes Fund Mangers.

"There are strong fundamentals within the copper market, giving it the ability to weather recent economic uncertainty."

A debt crisis in the United States and the euro zone has reinforced fears of weaker economic and demand growth.

UNEXPECTED

Workers at Chile's state-run miner Codelco recently staged a one-day company-wide strike to demand a bigger say in restructuring plans.

An eight-day strike last month over demands for a pay hike paralysed production at Freeport-McMoRan (FCX.N) Grasberg mine in Indonesia, expected to produce more than 500,000 tonnes of copper this year.

"We've had problems with contract renewals at Grasberg, which we weren't expecting as they normally settle quickly. There hasn't been a strike at Grasberg for some time so people were caught out a little bit by that," CRU's Meilton said.

The recent acceleration in labour unrest is similar to that seen during the commodity boom years of 2007 and 2008. Then the disputes took in workers across the world -- in Chile, Mexico, Peru, South Africa, and Indonesia.

Justin Lennon at Mitsui Bussan Commodities has raised his forecast for the amount of copper lost through disruptions this year to 660,000 tonnes from 540,000 tonnes in January.

Gayle Berry, analyst at Barclays Capital in January estimated production lost through disruptions in 2011 would total 540,000 tonnes or 3.5 of forecast mine output.

"So far this year we estimate that more than 420,000 tonnes of production has been lost due to disruption," Berry said.

"It's becoming increasingly evident that we don't have much left to play with in the allowance. If we carry on like this it's going to be difficult to see production growing at all this year."

Barclays estimates copper lost through supply disruptions in 2007 and 2008 totalled 2.31 million tonnes.

Eyes are now on wage contract renewals coming up.

"Contracts at Freeport McMoRan's (FCX.N) Cerro Verde in Peru are up for renewal this month," Meilton said, adding that a wage contract at Canada's Teck Resources's (TCKb.TO) Highland Valley mine expires at the end of September.

"There have also been weather-related disruptions -- flooding at Chile's Collahuasi and Escondida. There were no big production losses, but it all adds up."

(Additional reporting by Chris Kelly; Graphics by Scott Barber; Editing by Anthony Barker)

FILED UNDER: