Is copper set for a major breakout?

Continuing unrest at copper mines in Chile coupled with low global stocks and supply disruptions in other major copper producing countries have prompted Credit Suisse to raise its copper price forecasts for 2008-10 to US$4 per lb from its previous estimates of US$3.60 per lb in 2008, US$3.50 per lb in 2009 and US$3.00 per lb in 2010.

Unrest among Codelco’s contract workers, the bank notes in an April research report, has become more and more violent, with workers recently trying to set fire to water and power stations at the Salvador division and throwing stones and injuring permanent workers at the Teniente division. (El Teniente is the largest underground mine in the world with an annual capacity of 418,000 tonnes.)

Supply shortages and limited stockpiles were already a problem before the strikes in Chile started, Credit Suisse acknowledges. But labour unrest in the Andean nation is particularly problematic given that Chile produces almost 40% of the world’s copper and Codelco itself makes up about 12% of that figure.

Credit Suisse estimates that 212,000 tonnes of the expected 613,000 tonnes of new supply next year is expected to come from Codelco.

“To put a major strike in the mix would be like throwing petrol on the fire,” the report states. “If strike action does begin to grow in Chile then it is not unreasonable to suggest that prices could spike significantly above our US$12,000 per tonne (US$5.50 per lb) target for 2008.”

At the same time, the market “continues to overestimate new supply in the coming 3-5 years and buying the long-end of the curve should still prove to be a profitable trade, as it has been for the last five years.”

Credit Suisse also points out that global copper inventories have fallen 22% in the year-to-date and current copper inventories represent just 3.5 days of global copper demand.

In addition, mining companies have had to grapple with lower than expected grades, shortages of sulphuric acid, in addition to water and power issues in Chile, Zambia and the Democratic Republic of Congo.

Because of severe power shortages in Katanga province in the DRC, Credit Suisse argues, at least 500,000 tonnes are “unlikely to come on stream from major projects like KOV, Tenke Fengerume and Kowezi Tailings any time soon.”