Copper

The strike at Chile’s Escondida, the world’s largest copper mine, is ending after workers decided to invoke a rarely used legal provision that allows them to extend their old contract, the union said on Thursday.

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Hours earlier, talks between the two sides failed, and Escondida, which is operated by BHP Billiton, said it would attempt to restart production, presumably with replacement workers. The workers said they would present their decision to the government on Friday and return to work on Saturday.

Escondida produced 5% of the world’s copper last year.

Asian LNG Buyers Come Together

The world’s biggest liquefied natural gas buyers, all in Asia, are clubbing together to secure more flexible supply contracts in a move which shifts power to importers from producers as oversupply grows.

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Korea Gas Corp. said on Thursday it had signed a memorandum of understanding in mid-March with Japan’s JERA and China National Offshore Oil Corp (CNOOC) to exchange information and “cooperate in the joint procurement of LNG.”

Our March price trends report, which analyzes the entire month of February’s price data from the MetalMiner IndX, shows robust price increases in metals markets that are still running with the bulls.

March Price Trends

Our Stainless MMI led the pack, increasing 6.8%, but the copper, raw steels, aluminum and rare earths sub-indexes all showed strong gains, as well.

One area of concern this month is that oil prices have fallen back below $50 per barrel as U.S.
shale producers beat expectations by adding 8.2 million barrels to existing reserves. Low oil
prices would benefit metals producers by keeping energy and transportation costs lower, but
they also may drag down other commodities with them.

We don’t usually see investment metals such as platinum and gold increasing at the same time
as base metals, either, but positive sentiment about the economy had both increasing this month. So, until we see anything that points otherwise, a rising tide is still lifting all the (metals) boats.

If I was a copper miner, I would be rubbing my hands because copper prices are looking healthy as a horse.

Supply Disruptions

Workers at Cerro Verde mine in Peru put down there tools on Friday, halting output of 40,000 metric tons per month in a dispute over labor conditions (here’s a video interview and analysis I did about it for Swiss Financial Television). The strike stretched into its fourth day yesterday after a meeting between the union and management failed to resolve it on Monday. The mine is currently making about half as much copper as it normally does, because owner Freeport-McMoran hired contract workers to operate key areas.

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The action adds to disruptions at the world’s two largest copper mines, Escondida in Chile and Grasberg in Indonesia, which are losing production daily due to a strike and an export ban respectively.

The Technical Picture

Three-month London Metal Exchange copper. Source:MetalMiner analysis of fastmarkets.com data.

The technical picture is important because it tells a lot about what buyers and sellers are doing. Copper rose nearly 30% in November. Usually, after such a huge run it’s normal to see some selling but we haven’t really seen that yet.

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Since November, prices are holding pretty well and that’s a sign that bulls are still in control. A sharp price decline in oil prices last week would normally bring other commodities down but copper held its ground well. The red metal continues to make higher highs and higher lows, a textbook definition of a healthy uptrend.

What This Means For Metal Buyers

The diagnosis is that while copper’s bull market doesn’t show real signs of weakness, we continue to expect further upside moves. Buyers should keep an eye on the ongoing supply disruptions because they could hurt your budget.

Set of copper pipes of different diameter lying in one heap

The newly opened Cobre Panama mine in Central America could begin copper production as early as 2018 and reach full throttle by the end of 2019, which would be a much needed supply boost for a copper market that is set for its first deficit in six years and could be in shortage through 2020.

According to a recent post from Bloomberg, mine disruptions led to copper prices growing roughly 25% over the past six months. Demand in China and a boost in U.S. infrastructure have made copper the biggest gainer in Bloomberg’s Commodity Index.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Subscribe to our monthly buying outlook reports!

“Good copper projects are scarce at these prices,” First Quantum President Clive Newall told Bloomberg in a phone interview Monday from London. “There is an incentive price to build new greenfield sites, which is significantly above the current price.”

A Citigroup report added that copper prices need to rise another 15% to about $6,700 a ton before mining companies commit to new greenfield projects, which translates to the industry not likely boosting capital spending until 2019.

Copper Prices Drop this Week

Hit by a supply overload, multiple sources are reporting that copper prices fell to a two-month low this week.

Wrote Leia Toovey for the Economic Calendar:

“Factors adding pressure to copper include a higher U.S. dollar, disappointing import data from China and a pile-up of LME-tracked inventories. Also, on Thursday BHP Billiton said it was considering bringing in temporary workers to bring some copper production back online that has been impacted by the strike at its Escondida copper mine.”

How will copper and base metals fare in 2017? You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

Copper prices remained supported in February, trading in the ballpark of $6,000 per metric ton as a return to production at two top mines — which are combined responsible for some 8% of global output — looks increasingly doubtful in the near term.

Escondida Mine

A strike at the Escondida in Chile, the world’s largest copper mine, appeared far from ending during February. The strike increasingly turned more violent as protesters blocked roads and battled police. The events reflect the increasing bitterness and division between the two sides, as positions still appear to be far apart after almost four weeks of strike. Key differences include disagreement over changes to shift patterns and the level of benefits new workers receive.

Grasberg Mine

Meanwhile, Freeport-McMoran is under a concentrate export ban as it negotiates a new operating license from the government of Indonesia. Having limited storage capacity, the company will be forced to drastically cut output if Indonesia doesn’t give the company an export license to send material to its local smelter for processing.

Copper MMI

In late February, the company announced that it sees “no returning to business as usual,” as the miner cut output and laid off workers. Copper concentrate production at the mine has been stopped since Feb. 11, and ore output is being limited to stockpiling for future processing.

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In a memo, The company stated that during February it revised its operating plans, slowed its underground expansion and announced plans to drastically reduce manpower levels in an effort to cut costs as the company needs to survive while it works with the government to achieve a mutually viable solution to resume exports. So far, that agreement doesn’t seem close to coming together in the near term.

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This year, there will be other temporary suspensions at smaller copper mines such at El Soldado mine in Chile. In addition, some major contract negotiations in large mines are due this year.

What This Means For Metal Buyers

Copper prices might look expensive compared to what they were just three months ago, however sentiment in the industrial metals complex remains quite bullish and current supply issues could turn into large deficits if stoppages and disruptions are prolonged. It’s seems early to call for an end on copper’s bull market.

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Automakers sold 1.33 million vehicles in the U.S. in February, down 1.1% from the same month a year ago, as consumers continued to shift away from buying cars in favor of trucks and SUVs.

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Our Automotive MMI fell 4.3% as well, due in part to a pull back this month in steel prices, particularly the hot-dipped galvanized variety. There’s been plenty of analysis on our site about whether the steel price fall is merely a pause in an overall up trend or a sign of deeper issues in the individual North American product markets.

Automotive MMI

If major automotive products such as cold-rolled coil and HDG are, indeed, being squeezed then prices could increase quickly in the coming months as mills take advantage of short supply, even if more capacity comes online later in the year.

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The other products that make up the index are still firmly in bull market territory with copper leading the way.

The other major automotive consumer market that creates supplier demand is China’s, the world’s largest automotive market. It saw auto sales decline by 1.1% year-on-year in January to 2.2 million units. Total vehicle sales, including trucks and buses, however, came in 0.2% higher year-on-year to 2.5 million units. Some of these numbers could be affected by the Lunar New Year holiday. China is also entering the planned final year of a major government automotive purchase rebate which could affect sales as the incentive winds down.

Actual Automotive Metal Prices

U.S. Hot-dipped galvanized steel fell 1.5% from $841 a short ton in February to $828/st this month. U.S. Platinum bars increased 2.92% from $993 an ounce in February to $1,022 an ounce this month. Primary three-month LME copper increased .08% from $5,930 per metric ton in February to $5.935/mt this month.

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Copper prices are trading near $6,000 per metric ton, up 30% from just four months ago. Things can change quickly and I don’t know where prices will be by the end of the year, but what’s clear to me is that most analysts’ forecasts seem way off. According to a recent survey polled by Reuters, copper analysts are are expecting prices to average $5,350/mt this year.

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In my opinion, this is a very conservative price average and quite bearish due to what Behavioral finance calls “anchoring,” the human tendency to attach or “anchor,” our thoughts to a reference point even when it makes no logical sense. Analysts see that copper prices have risen significantly and quickly, so they anchor the new price of $6,000/mt onto the $4,500/mt level where prices were trading at just a few months ago. This creates the idea that $6,000/mt is an expensive price for copper and, for this reason, you will almost see no one but me calling for an average above $6,000/mt this year. Read more

The showdown between global copper miner Freeport-McMoran, Inc. and the Indonesian government got a little hotter this week.

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Arizona-based Freeport majority-owns the world’s second-largest copper mine, Grasberg in Indonesia. The company has been trying to get a new permit from the Indonesian government to continue exporting copper concentrates for the last six months. On Monday Freeport said it would not accept terms of a deal the government offered that would allow it to resume shipments of copper concentrate that have been idled since January 12.

One More Year… Then Give Up Your Mine

Friday the Indonesian government offered Freeport a new, one-year deal that would allow the company to continue exports but only if it agrees to new rules requiring it to build a new copper smelter in Indonesia within the next five years and also agree to switch to an operating license, the terms of which would require Freeport to, eventually, give up control of Grasberg.

Kennecott Copper Mine

Open pit copper mines such as Rio Tinto’s Kennecott in Utah could increase production and increase sales if Grasberg stays closed. Source: Adobe Stock/Photofly.

Freeport CEO Richard Adkerson, naturally, turned down that offer and said the company is unwilling to revisit the terms of its 30-year contract to mine at Grasberg, which accounts for about a third of Freeport’s annual copper production and 40 to 50% of its worldwide assets. He also said Freeport would consider going to arbitration if it can’t settle this dispute within 120 days. Read more

All work has stopped at Freeport-McMoran‘s giant Grasberg copper mine in Indonesia, just over a month after the country halted exports of copper concentrate to boost domestic industries.

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Freeport had said the suspension would require the mine to slash output by 60% to approximately 70 million pounds of metal per month if it did not get an export permit by mid-February, due to limited storage. A strike at Freeport’s sole domestic taker of copper concentrate, PT Smelting is expected to last at least until March and has limited Freeport’s output options as Grasberg’s storage sites are now full.

Nippon Exec: Chinese Steel Prices Will Hold Firm

Nippon Steel & Sumitomo Metal Corp., Japan’s biggest steelmaker, expects steel prices in top consumer China to hold firm at least until its Communist Party congress late this year, amid solid demand that is underpinning coking coal and iron ore markets.

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Chinese futures contracts for steel rebar used in construction have already risen 17% in 2017, on top of a gain of more than 60% last year

We warned last month that the mostly small losses the prices our MetalMiner IndX experienced were caused by investors taking profits.

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Our suspicions were confirmed when almost all of our sub-indexes had big price rebounds this month. The Automotive MMI jumped 12.2% Raw Steels 8% and Aluminum 6%. Even our Stainless Steel MMI only dropped 1.7% and has taken off since February 1 as nickel supply is even more in question now with both the Philippines and Indonesia’s raw ore exports in question.

The bull market is on for the entire industrial metals complex. Last month’s pause was necessary for markets to digest gains but the strong positive sentiment for both manufacturing and construction shows no signs of ebbing in the U.S. and Chinese markets.