Copper stays low as wage talks loom

Excess supply and weak demand have prices jammed in neutral, and looming labour talks are adding uncertainty.

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Copper is unlikely to be given any respite from weak prices and excess supplies any time soon.

The one factor that could influence prices in the next few months is a strike by copper workers should talks break down. This suggests that investors have only small windows of opportunity to take advantage of price fluctuations.

A forecast from Bank of America Merrill Lynch shows that prices are not expected to rise this year. Even top industry executives painted one of the bleakest outlooks in years at the CRU copper conference in Santiago last week.

While prices have recovered to about US$6,000 per tonne from January, when the market fell below $5,500 for the first time since 2009, the market was flat amid a surplus of about 160,000 tonnes at the end of the first quarter, according to estimates.

Three-month copper on the London Metal Exchange was up 0.2 per cent to $5,957.50 a tonne in early trading yesterday. The most-traded June copper contract on the Shanghai Futures Exchange slipped 0.3 per cent to 43,230 yuan a tonne.

Demand from China, the world’s top consumer, grew at a meagre 0.7 per cent in the first quarter as credit tightened and the buying of refrigerators and air conditioners, in which copper is used extensively, waned.

Ole Hansen, the head of commodity strategy at Saxo Bank, said that soft demand from China is currently expected not to improve in the near-term as a sharp fall in steel prices has been partly explained by slowing demand from the housing sector. “ A slowdown in house completions will eventually lead to an additional slowdown in demand for copper. Some of this slowdown may be offset by increased demand from further expansion of the Chinese power grid.”

While cuts in production and delays to projects have removed eight projects equating to 1.5 million tonnes that were due to come on stream by 2019, it will take years before the global market feels any supply pinch and prices recover.

The base metals consultancy CRU does not expect prices to retest 2013 levels of about $7,000 per tonne until 2017, and capacity cuts will not bite until 2018 when the market is forecast to return to a deficit of 300,000 tonnes.

According to Pradeep Unni, the head of trading for commodities and currencies at Richcomm Global Services in Dubai, prices should largely be bound in a range between $5,700 and $6,700 a tonne on the upside this year.

“With China, the key consuming nation of copper likely to witness less than 7 per cent growth, and India, yet another key consuming nation lagging sufficiently behind, copper prices in 2015 could witness lacklustre and range-bound price movement,” Mr Unni said.

Saxo Bank’s Mr Hansen sees a narrower band. “We recommend trading the current range and look for buying opportunities towards $5,800 and selling towards $6,100.”

On a more urgent note, Bank of America Merrill Lynch expects “a stabilisation of economic activity in China may support prices in coming weeks, but a rally is unlikely to be sustained”.

CRU, which expects a balanced market this year, expects copper to grow to a 250,000- tonne surplus in 2016.

“The worst is over for the price, but the recovery is unlikely to be swift and dramatic,” said Vanessa Davidson, director of CRU copper research and strategy.

Bank of America Merrill Lynch is bearish on copper’s fortunes next year and expects prices to fall below $5,000 a tonne.

However, Saxo Bank expects the commodity to trade between “$5,900 this year and $6,100 next”.

The weak prices are also a cause for worry for the metal’s producers. Firms such as Chile’s state-run miner and the world’s top copper producer Codelco, Antofagasta and Grupo Mexico are still struggling to slash costs while faced with long-time problems from lower ore grades to weak revenue from by-products such as gold and molybdenum that are hurting margins.

Power costs in Chile, which accounts for a third of global output, are the highest in the world among other mining nations such as Russia, Zambia and Australia, said the Codelco chief executive Nelson Pizarro.

Mr Pizarro and the Antofagasta chief executive Diego Hernandez both called for greater automation to help cut costs.

Another factor to take into account is the upcoming labour talks at some of the world’s biggest copper miners.

But the copper market seems to be perilously indifferent to the threat posed by this year’s contract talks at mines including one of the world’s largest – Grasberg in Indonesia – and Antamina, Peru’s biggest, risking a bullish shock if workers move to strike, analysts said. “I think people are assuming with the change in the market, it’s going to automatically mean unions will be more flexible. But it could be a very tough situation,” said Juan Carlos Guajardo, the executive director of the Santiago-based mining consulting firm Plusmining.

Last year, Antofagasta agreed to four-year contracts, including pay increases and cash bonuses, at its mines across Chile.

But the outcome of talks at Antamina and Grasberg, where contracts expire in July and September respectively, and worker unrest that has paralysed production recently, may set the tone for the industry this year.

Antamina’s majority shareholders are Glencore and BHP Billiton, while Grasberg, which has been plagued by worker strife in recent years, is majority-owned by Freeport McMoRan.

With just two months before talks are likely to start, the union representing most of the 2,860 workers at Antamina said it will not scale back its demands owing to copper’s falling price.

“There’s a tendency to dramatise by saying prices are low ... But they [Antamina] are still profitable,” said Jorge Juarez, the secretary general of the Sutracomasa trade union.

By historic standards, prices about $6,000 per tonne are not low, he said. Ten years ago, prices were about $3,500 per tonne.

Still, in a sign that talks may be more complicated than in previous years, Mr Juarez said he may propose a one-year agreement, rather than the usual three.

For the company whose profits have been hurt by the weaker conditions, lower prices will “definitely influence” negotiations, a mine spokesman said.

Four years ago, the last time such a large number of contracts were up for renegotiation, workers at the world’s biggest copper mines in Chile, Peru and Indonesia downed tools for a bigger slice of the bumper profits owners made from record prices of about $10,000 per tonne.

Thousands of Codelco workers staged a strike, the first in two decades, and an eight-day strike over pay stopped work at Grasberg while miners at Escondida, the world’s top mine, staged a one-day strike over wages.

Estimates vary on how much copper was lost due to that wave of industrial action, but the outages helped propel prices back towards $10,000 per tonne.

This year, the backdrop is starkly different: prices are languishing at six-year lows of about $6,000 per tonne; a quarter of the world’s mines are unprofitable; miners are in the throes of the most vicious cost-cutting regime in years and demand from China is slowing.

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