Copper may rise on strike fears in Chile

Speculations are rife that copper would recover its last week's loss of about 6 per cent, with strike looming large on BHP Billiton's Cerro Colorado copper mine in northern Chile.

The mine workers' union, on Friday, rejected the management's 2 per cent wage hike offer, saying the proposal fell short of expectations, prompting the possibility of a strike. The final decision on the strike, however, is set to be taken on Sunday.

Cerro Colorado produces approximately 115,000 tonne of copper a year, equivalent to about 2.1 per cent of Chile's total output. Experts believe workers may stage a protest for a 7.8 per cent pay hike in line with BHP Billiton's Escondida copper mine. Escondida, the world's largest copper mine, also in northern Chile, had struck work for 25 days last year.

The mining company had asked for five more days to reach an agreement, as it is entitled to under the Chilean labour laws, and the deadline ends on Sunday. Although there is no evidence of fresh buying from speculative traders and all indications are that Chinese are going to wait until after the new year holidays, experts believe the strike at BHP's Chile mine will drive the market up.

Some fund houses had added more metals to their portfolios in the first few days of January. But the pattern has become less pronounced recently.

Copper dropped 6 per cent last week, with Friday seeing a major decline, taking the total loss this year to 15 per cent from $6,201 on January 2 to $5,250 a tonne last Friday. Copper futures on the New York Mercantile Exchange fell 10.75 cents, or 4.3 per cent, to $2.423 a pound last Friday, the lowest closing price since March 24. Prices have fallen 16 per cent this year.

Base metals have lost as much as 27 per cent this year on rising global inventories and slowing global growth. The debacle in the metals market is mainly attributed to the 20 per cent loss of $1 billion investment by the metals trading hedge fund, Red Kite Management, in January.

Major hedge funds are expected to go slow this year, owing to an estimated $6.6 billion loss they incurred last year on natural gas trades. The loss of hedge funds in the metals market last year may prompt some speculators to reduce their holdings.

Meanwhile, zinc prices nosedived 12 per cent on Friday to $2,990 a tonne, a decline of 27 per cent this year alone. The metal, last year's second-biggest gainer behind nickel after jumping 126 per cent, posted five straight weeks of decline to Friday, as a result of rising inventories in the LME-registered warehouses.

Stockpiles have increased 8 per cent since the end of December 2006 to 98,350 tonne on Friday.

Analysts said the trend was going to continue due to excessive supply from China, the biggest producer and user of zinc, as the country turned a net exporter of the refined metal in 2006 for the first time in three years. According to a report by Goldman Sachs, the supply will surpass demand by 85,000 tonne this year compared with a shortfall of 272,000 tonne in 2006.

Nickel is set to remain rangebound, as the supply tightness is expected to be offset by the downward trend in other base metals. Last Friday, nickel gained 1.5 per cent or $550 to $37,400 a tonne, as stockpiles continued to drop, exacerbating supply tightness.

Aluminium, the most traded metal on the LME, slipped 1.2 per cent or $33 to $2,720 a tonne, while tin fell by $200 to $11,700 a tonne and lead dropped by $35 to $1,630 a tonne on Friday, indicating a further southward trend mainly in the wake of slower growth in the US, the world's second-biggest consumer after China.