Freeport Declares Force Majeure, Copper Positioned to Rally

By Leia Toovey- Exclusive to Copper Investing News

Last week, Freeport-McMoRan Copper and Gold (NYSE:FCX) declared force majeure on shipments of concentrates from its Grasberg mine in Indonesia. The labor dispute, now well into its second month, has turned violent in recent weeks, with both staff and equipment harmed in the process.

In a statement to the press, Freeport spokesman Ramdani Sirait stated “Lower concentrate production has impacted our ability to fully perform our sales commitments and as a result, we were required to declare force majeure on the affected concentrate sales agreements.” Freeport has been working with customers to reschedule deliveries since the strike began September 15, added Sirait.

The attacks on equipment and staff have set back Freeport’s efforts to maintain metal output through the use of contract workers. Recently, four people were killed, a pro-independence Papuan group claimed responsibility for the killing of a sub-district police chief this week, and prior to that death, three people were killed near Grasberg by an unidentified gunmen. Protestors also sabotaged a pipeline responsible for transporting concentrate from the mine to the port; damage that Freeport says will take at least a month to repair. “Freeport has initiated repairs to the damaged pipelines but has not been able to gain full access to the affected areas of the pipelines because of the road blockades by striking workers,” said  Sirait. Uncertainty surrounding the repair date of the pipeline combined with nonexistent stockpiles at the port led up to the miner’s decision to declare force majeure.

Indonesia’s government has pledged to help end the strike, however, analysts question how effective any help from a government will actually be in returning the mine to normal operation. Meanwhile, talks have been at a standstill between Freeport and a union representing the striking workers. Freeport has offered workers a 30 percent pay raise, but the union is still demanding a minimum of $7.5 an hour and according to a union representative, will not accept a penny lower.

According to Freeport, the strikes will result in a loss of 100 million pounds of copper and 100,000 troy ounces of gold output. Currently, production at the mine is down approximately 15 percent since the beginning of the year. Freeport’s declaration of force majeure is running parallel with a time when many miners and smelters are involved in negotiations on fees for processing copper. This, according to analysts is likely to enhance the miner’s bargaining power and force smelters to be more competitive on processing fees.

The strike is impacting Freeport’s output as well as aiding in tightening the copper supply chain; a fact that could result in a price rally over the coming months. “I think the market is largely focused on demand with this ongoing disruption, and with more clarity in Europe regarding their debt crisis, I think that the market could switch attention back to supply shortages,” said Catherine Virga, director of research at CPM Group. “The fact that we have steadily declining LME (London Metal Exchange) and Shanghai (Futures Exchange) inventories and a pickup in cancelled warrants indicates this trend is going to continue,” Virga said. Analysts admitted that the current copper prices are being impacted by concerns of waning demand created by the ongoing debt struggles in Europe. However, once the markets turn their focus away from the negative sentiment surrounding Europe and instead focus on the exacerbating copper supply shortages, the metal is nicely positioned for a rally.

Freeport’s declaration of force majeure has forced China’s Tongling Nonferrous Metals to seek copper concentrate on the spot market. Recently, China’s copper smelters scaled back their rate of refined copper production as supplies of raw material concentrate and scrap fall. “It’s been hard to find blister and scrap in the domestic market because prices fell and suppliers are not willing to sell. Refined production is being affected,” a trading manager at a copper producer said. China’s production of refined copper fell 7.5 percent in September from August after three straight gains. If the Freeport strike drags on, Treatment charges and Refining charges may decline further as smelters are forced to lower their prices in an attempt to compete for declining concentrate supplies.

 

Securities Disclosure: I, Leia Toovey, hold no direct investment interest in any company mentioned in this article.