Freeport strike highlights fragile copper supply

By Time of article published Jul 6, 2011

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A strike for higher pay has paralysed production at Freeport McMoRan Copper & Gold's giant mine in Indonesia, workers said on Wednesday, the latest disruption to a fragile copper supply pipeline that is providing a floor for prices.

A series of bad-weather related events and industrial action has put strain on a market that many believe will deepen into deficit this year, propping up prices of the metal on the London Metal Exchange.

“It further highlights the risk to copper supply growth this year,” analyst Gayle Berry of Barclays Capital said.

“You have got declining output from the world's two largest mines, plus weather-related disruptions, a slower than expected ramp up at Esperanza (copper mine in Chile), plus now these labour issues,” she said.

Barclays Capital sees the copper market in a 700,000 tonne deficit this year.

Freeport's Grasberg mine holds the world's biggest gold reserves and is one of the largest copper producers, and the strike, which was in its third day, highlights the rising labour costs for businesses in booming emerging markets.

Workers at Codelco in Chile, the world's top copper producer, are set to strike for 24 hours next Monday to protest against an overhaul of the country's giant state mining company.

Bad weather this year has repeatedly hit the mining heartland of Chile, disrupting the operations of copper miners, and more heavy snow, wind and rain is expected in Chile's copper-rich north.

“(These) adverse effects should probably not last for long, but will be contributory factors to a much tighter global copper market over the rest of the year. We therefore see good support for copper prices,” Commerzbank said on Wednesday in a note.

Chile's Antofagasta said last month the ramp-up of its Esperanza copper mine, expected to contribute the lion's share of supply growth this year, would be completed in the second half, after taking longer than initially planned.

“In a different type of environment you'd expect that to help increase price,” Berry said of the supply disruptions. “At the moment, the markets seem to be a lot more focused on macro events (but) you can certainly say they are providing a floor.”

Copper prices in London fell on Wednesday, after China raised interest rates for the third time this year, but are holding within 7 percent of record highs, despite still tepid demand from top consumer China.

Gold edged lower on Wednesday after China's rate hike, driven more by investor flows and global risk sentiment, than supply interruptions.

WORSENING ORE QUALITY

The Freeport mine is already facing a 17 percent decline this year in production of copper because of worsening ore quality, with the strike likely to exacerbate the drop, said MineLife analyst Gavin Wendt.

Freeport has so far only said that concentrate shipments have not been affected, although it has declined to comment on whether operations and production has been disrupted.

Analysts said any force majeure, enabling Freeport to halt contract shipments to buyers, would depend on the level of stocks the U.S. mining firm maintained at the remote mountain site.

“You may not see a force majeure unless it continues over a week,” said UK-based VM Group analyst Carl Firman. “Generally mines have built into their mine plans a certain buffer of stocks, and I'd imagine they will work those down first so they can keep shipments and contracts secure.”

There are around 8,000 mine workers taking part in the Freeport strike. Workers earning $1.50 per hour are pushing for higher wages, since their union says other Freeport workers around the world earn over ten times that amount.

The salary is in line with average wages last year of about $230 a month in the eastern Papua province, the country's statistics bureau said, though wage inflation has been spurred by over 6 percent growth in Southeast Asia's top economy and by record commodity prices this year. - Reuters

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