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Base Metals
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General Market Commentary
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General Base Metals
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General Market Commentary
More investment in copper needed, AllianceBernstein analyst says
AllianceBernstein, a global investment management firm with an independent sell-side research arm, is calling for greater investment in copper to build enough capacity to meet demand.
“At a conservative estimate, the world’s mining community needs to approve the investment of about 1 million tonnes per annum of new copper capacity each and every year and, so far, this has proven impossible,” Paul Gait of Bernstein’s European metals and mining division, warned in a recent research note.
“In part, this is because of the capital intensity and lead times that are required to create the economies of scale to profitably exploit either low-grade copper, or copper that is situated at extreme depth,” the London-based analyst explained, describing the red metal as “the scarcest and most important industrial commodity.”
“It is fair to say that the continued flow of copper is a global strategic imperative and even more so if we are ever going to meet the demands of the green energy revolution,” Gait noted.
This year, supply disruptions at three of the world’s largest copper mines—BHP Billiton’s (NYSE: BHP; LSE: BLT) Escondida mine in Chile and Freeport McMoRan’s (NYSE: FCX) Grasberg mine in Indonesia and Cerro Verde mine in Peru—have helped “support prices at 20% above the 2016 average,” according to BMO Capital Markets, which forecasts that “2017 is on track to deliver the largest disruption to initial production estimates since 2008.”
At Escondida, a 44-day strike ended in March without a new labour contract, while Freeport halted production at its Grasberg mine in February after the country imposed a ban on concentrate exports, and employees at its Cerro Verde mine held an 18-day strike in March.
BMO estimates that the strike at Escondida, the largest copper mine in the world that it estimates is responsible for about 5% of global mine supply, “will have cost the market nearly 200,000 tonnes of production, including some additional losses as the mine is expected to take two weeks to resume normal operations.” In addition, given that the strike “ended without a new labour contract negotiated (a legal provision allowed the workers to return to work for 18 months under their old contract, with a new agreement targeted for that time), another disruption in 2018 remains a possibility.”
Disruptions at the Grasberg and Cerro Verde mines, meanwhile, which BMO says are the world’s second- and third-largest copper mines, representing roughly 4% and 3% of global supply, respectively, have “further tightened supply.” The bank estimates that “contract disputes with the government and strikes”at Grasberg and Cerro Verde have taken a total of between 80,000 and 90,000 tonnes of additional copper out of the market so far this year.
“Since 2004, we estimate that strikes reduced annual mine supply by an average of 115,000 tonnes per annum, with 2009 the highest year at 309,000 tonnes, and 2017 already at an estimated 203,000 tonnes (grouping in Grasberg’s issues rises to 290,000 tonnes),” BMO stated in its report.
“With Grasberg seeming unlikely to be resolved in the near term, however, and additional strikes possible globally, 2017 is on track to exceed 2016’s disruption by nearly 500,000 tonnes, and to be the highest since 2008.”