The breaking news this week is that Chile’s Escondida mine operator BHP has announced it looks like a strike has been averted and that a settlement plan is being put to the workers.
That is good news for a market widely expected to go into deficit this year, according to Mining.com.
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But the prospect of a strike was all that was holding up the copper price, which promptly fell 5% on the news, touching a low of $2.55 a pound ($5,622 a metric ton) in New York and down more than 20% from a nearly four-year high struck a little over two months ago, according to Mining.com.
Production in the world’s largest copper producer, Chile, has been plagued this year by a number of issues (in addition to BHP’s problems).
Competitor Antofagasta announced this week a disappointing set of first-half results. The miner reported production was down 8.5% in the first six months of the year compared to last, due to poor ore grades and infrastructure issues at its biggest mine. Revenue rose on higher prices earlier in the year, but profitability still fell 32%.
The copper price has taken a beating recently on widespread fears about global trade and political turmoil in places like Turkey, but a recent S&P Global report paints a rosy picture for producers regarding future prices, saying new discoveries are falling way below historical standards.
Producers have increasingly focused on developing their existing resources, the report states. This may be due to lack of faith in future prices — the end of the super cycle, or a more cautious post-financial-crash investment climate.
Chinese growth is slowing and producers are more inclined to maximize existing resources than bet the farm on new exploration and invest in new greenfield projects.
S&P reports Latin America hosts over half of copper discovered. Chile and Peru alone account for 83% of copper discovered in Latin America and 46% of the global total found since 1990. Of the 139.9 Mt of copper contained in the 29 discoveries made over the past 10 years, almost two-thirds is contained in the four largest deposits, S&P reports, illustrating the somewhat precarious nature of the copper supply market.
The pool of projects likely to come to market over the next decade is limited by the low level of investment and the long, up to 20-year lead in from discovery to production.
Although prices are currently under pressure from trade fears and a strong dollar, global demand has held up well so far, in the region of 2-3% annually.
Not surprisingly, miners are flagging up supply risks as a bigger issue for the copper market than lack of demand.
In the medium term, they are probably right. Despite all the noise about trade fears and tariffs, the reality is global growth and metals demand has remained robust. Contemporary developments are likely to trump medium-term supply risks in the minds of investors. As such, prices are going to remain subdued this year — if not bearish, then at least trading sideways.
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How we go next year, though, is another matter.
If trade issues can be even partially resolved and some degree of confidence restored, prices could recover; but, for the time being, it is buy as needed.