Copper Price Surges on Threat of Escondida Strike

The copper price surged on Wednesday as concerns over a potential supply stoppage in top producer Chile continued to rise. Workers at Chile’s Escondida mine have voted to reject BHP Billiton’s (NYSE:BHP,ASX:BHP,LSE:BLT) wage offer and go on strike.
The news pushed the London copper price above $6,000 a metric ton, a 20-month high. The price retreated later in the day as traders took profits, and by midday copper was sitting at $5,920.95.
Escondida is the world’s biggest copper mine, and is controlled primarily by BHP Billiton and Rio Tinto (NYSE:RIO,ASX:RIO,LSE:RIO). It produced 452,0000 tonnes of copper during the half year ended December 31, 2016, unchanged from the same period a year earlier. BHP Billiton is calling for the mine to produce 1.07 million tonnes in the first six months of 2017.
The strike is expected to begin 48 hours after the vote, but could be postponed for a five-day government mediation. There are concerns that a long conflict could cause a supply shortage and increase the copper price.

Other Strikes Ahead?

A strike at Escondida could also set a precedent for other copper mines facing wage renewal negotiations this year.
“The strength of the vote closes the door to any attempt by the company to introduce its disastrous plans to lower costs through making the workforce cheaper,” said the strikers’ union in a statement. “If Escondida imposes its policies, it will pave the way for other companies to do the same.”
Similarly, ICBCS Standard Bank said, “[a]n imminent strike at Escondida may be the first of several labour disputes in the copper sector. Our models suggest a refined deficit this year (albeit a marginal 70,000 tonnes).” 
Labor negotiations will also take place this year at mines owned by Codelco, Barrick Gold (NYSE:ABX), Antofagasta (LSE:ANTO) and Teck Resources (NYSE:TECK). Those mines account for around 14 percent of global mine production capability, according to Paul Benjamin, research director at consultancy Wood Mackenzie.

Enough Copper for Now

Chilean President Michelle Bachelet’s announcement that her administration plans to break the nation’s copper addiction and diversify the economy has also raised concerns about copper supply. However, at least for now it appears that softer demand will keep the market in balance.
JPMorgan said in a recent report that “major Chinese and Japanese smelters are currently well supplied,” adding, “[i]n addition, three Chinese copper smelters (Jinguan, Yuguang, and Minmetals) with total 2016 production of 460,000 tonnes are planning to close for maintenance between February and March for 30-45 days.”
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.