Over the last few years Chinese demand (or weakness of) has been the main cause of volatile commodity prices. Copper has been one of those commodities but supply factors have also been influential in pushing copper prices to their highest level in the last two years. Strikes and supply disruptions (see graph below) in two of the world’s biggest mines will have a significant impact:
Escondido in Chile (the largest in the world) and Grasberg in Indonesia.
Both mines account for 9% of mined copper supply. One-month shutdown at both mines removes 140,000 tonnes which equates to 0.7% of world output. In both mines labour contracts are up for renewal and they account for 14% of production. The video below from Al Jazeera looks at the strike action by miners at Escondido in Chile where workers are rallying against cuts to pay and benefits by owners BHP Billiton which are designed to improve productivity. However, in the last three years productivity in the mine is up 48% and the labour force has been cup by 17%.
Add to this more demand from China and there is only one way copper prices can go – it is up 20%. Resolutions to labour relations are needed in both Chile and Indonesia if supply is to be restored to pre-dispute levels. Furthermore the outlook for copper demand is strong with its importance to electric vehicles and wind and solar energy units. In the long-term, depletion of copper ores will also put pressure on prices northwards.
Source: The Economist 16th Feb 2017. Al Jazeera 23rd Feb 2017
The price of copper is on the up. Below are some Supply and Demand factors.
Supply curve shifts to the left.
Disruptions to production in
* Peru – protests
* Chile – strikes
* Zambia – power shortages
Demand curve shifts to the right
In the light of fast-modernising its power grid the demand for copper in China is vast.
“Copper consumption estimates for China are being revised up. Huge spending on copper-intensive power infrastructure on the state grid in ‘rural areas’ will continue through 2012 (12 bn RMB). Beijing has also renewed the ‘home appliance subsidy scheme’ and is promoting electric cars, which are twice as copper-intensive as conventional vehicles.” – Patricia Mohr, Economist, Scotiabank
Graph from The Economist.
One cannot underestimate the importance of copper to the Chilean economy. Copper provides 20% of Chile’s GDP and makes up 60% of its exports. Chile’s economy is growing at approximately 6% per year while inflation is at 1% and unemployment 6.4%. Although Chile does have a productive agricultural sector and tourism, the price of copper does have a significant impact on the economy.
Chile has done very well out of the shift of China’s rural population to the more urban areas – new homes with copper wire and pipes are needed. Furthermore Emerging markets everywhere are using vast amounts of copper to put in bridges, cars, fridges and more or less anything that uses electricity. However China’s recent slowdown has caused copper prices to slide by 15% since the beginning of the year.
The Economist reported that in 2000-05 the government’s income from mining averaged $2.1 billion a year. As Chinese growth accelerated, that rose to $11.5 billion a year between 2005 and 2011. But the boom owed almost everything to the copper price. Chile’s output of the red metal has hardly grown in a decade.
The biggest threat to Chile’s copper boom comes from China. If the country that buys 40% of the world’s copper slows further, the price of the metal will fall again and Chile will have rely on something else. Is this another resource curse waiting to happen? Below is a short report from AlJazeerah which also looks at the positives from lower copper prices – lower currency value, the peso, and ultimately more competitive exports.
Demand for copper and other industrial metals is outstripping supply, as industrial output by the emerging markets economies surges ahead of their pre-recession levels. China’s unrelenting demand being an important factor.
Global copper inventories are down by about a third this year, and traders say that with supplies so tight, the risk is that prices could rise more rapidly if the recovery gathers pace. The major exception to this trend is China, which is sitting on a large stockpile that it built up during 2009, but is expected to be used up during the coming months. Prices in dollars have also been supported by the relative weakness of the US currency, compared with the euro and particularly the Chinese yuan.
Copper prices record high $9,660 a tonne on the London Metal Exchange and near all-time peak of $4.44520 per lb on New York’s COMEX market.