Editorial: Copper prices near two-year highs

If you ever wondered what would happen to copper prices if 10% of world supply suddenly went offline, mid-February provided the answer: Spot copper prices soared to 20-month highs of US$2.79 per lb., as sociopolitical problems engulfed the world’s two largest copper mines: Escondida in northern Chile and Grasberg in Indonesia.

The Escondida mine, 57.5% owned by operator BHP Billiton, normally produces 1.25 million tonnes per year of copper, plus by-product gold and silver on a 100% basis — or 6% of world copper supply — from two open pits that feed two copper concentrate plants, as well as two leaching operations (oxide and sulphide).

The iconic mine is celebrating 25 years of operation during BHP’s 2016 fiscal year, having processed more than 2 billion tonnes of ore through solvent extraction-electrowinning and flotation.

But on Feb. 9, in the wake of bitter negotiations that broke off in late January, 2,500 unionized workers at the mine went on strike, demanding higher wages and a bonus that BHP refuses to pay. An ongoing strike at Escondida would translate into 25,000 tonnes of copper supply a week being removed from the market.

The union has said it is prepared to settle in for a long strike if its demands are not met, but by Feb. 14, the union had accepted the Chilean government’s invitation to try to resume a dialogue and possible mediation led by a government representative. BHP had yet to respond to the government’s invitation at press time.

News of the Escondida strike drove spot copper prices from US$2.64 per lb. to US$2.76 per lb., with copper prices now having held steady above US$2.60 per lb. for most of 2017, after having traded at a desultory US$2.10 per lb. as recently as October 2016.

Looking at a five-year price chart, copper prices look to have turned a corner with new support in the US$2.50 per lb. range, after briefly dipping below US$2 per lb. at the nadir in January 2016, when gloom pervaded every corner of the resource sector.

Last year there was only a 350,000-tonne surplus in the global copper market according to Wood Mackenzie, and most analysts had started the year predicting a similar, slight oversupply, indicating that just a couple months of disruptions at these two mega-mines could throw the copper market into deficit.

The situation at Grasberg is much murkier politically, with operator Freeport-McMoRan having yet to receive even a temporary permit to export copper concentrate from its Grasberg copper-gold mine in Papua province, which normally accounts for 4% of global copper output.

The Indonesian government famously banned all export of raw copper, nickel and bauxite concentrates from the country in 2014, though it has recently eased some restrictions on nickel and bauxite exports. Without a smelter in the country, Freeport has tried to buy time by obtaining temporary permits until it builds a smelter, the export ban is relaxed or it exits the country.

The Indonesian government’s latest refusal has forced Freeport to curtail production at Grasberg by 60%, or 35,000 tonnes per month of copper.

Scotiabank mining analysts point out that 2017 has an “unusually high number of global [copper] mines that are facing labour contract renewals,” and that 16% of global supply will deal with contract negotiations this year, the highest level in four or five years. They add that “given the overall positive sentiment on the copper price, it is likely we’ll see unions ask for more, but companies may not be ready to give in to higher wages and benefits.”

The new worry over labour disruption at the world’s copper mines has already prompted Goldman Sachs analysts to change their 2017 copper production forecast to an overall 0.4% decline, from a more conventional 1% increase.

So keep an eye on how the Escondida strike is resolved, not just for its immediate effect on the supply-demand balance for 2017, but for the tone and precedent it will set for other labour negotiations at copper mines around the world.