A Strike Threat At Escondida Shows How Fragile Copper Supply Is

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By Stuart Burns

We posted a review of the copper market last week. It called out alternative views on the balance of supply and demand and the resulting direction for prices this year.

One of the caveats in the post was the possibility of supply disruption in 2017 returning to the more historical norm of 5% of supply from last year’s unusually stable 3.5%. No sooner was our review posted, than reports came out that wage negotiations at the Escondida mine in northern Chile appear to be taking a turn for the worse.

What’s Happening at Escondida?

Escondida is 57% owned and operated by Anglo-Australian giant BHP Billiton (NYSE:BHP), with Rio Tinto Group (NYSE:RIO) holding a 30% stake. It was thought at current prices BHP was making enough to agree an early settlement, but a report in the Telegraph newspaper suggests that negotiations are breaking down as both parties’ positions polarize. Miners are rejecting BHP’s current offer and the negotiations look likely to go to government arbitration before a strike can be called.

In its defense, BHP says copper prices are still lower than they were at the time the current deal was struck with unions and sources close to the company point out that Escondida workers are still paid well above the national average, but that is unlikely to have much impact on the miners union’s demands.

What Does This Mean for Copper Prices?

Neighboring miner Antofagasta (OTCPK:ANFGY), which has operations not far from Escondida, reported a strong finish to the year, with 2016 production up 12.5% over 2015. Copper production surged 13.8% in the fourth quarter versus the previous three months, while costs fell, rather undermining Escondida’s argument that it can’t afford to pay any more.

With wage negotiations looming at Canadian operations in coming months, the fear is Escondida could spark off a wave of strikes and supply disruptions. Although opinions vary, many estimate the copper market is close to supply-demand balance, so supply threats are having a disproportionate impact on all prices and creating considerable volatility. Escondida may be the first of this year’s wage negotiations but it won’t be the last, making price prediction particularly difficult in the months ahead.

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