The CEO of a leading Indian non-ferrous metals group says however efficiently the businesses are run here, developments abroad will finally leave a major impact on the working of local producers. In our very low import tariff regime, the London Metal Exchange (LME) rates provide the pricing cue here. This particularly holds good for copper, the bellwether for other base metals, since except for a small share of the country's red metal production by Hindustan Copper, sourced from its own mined ore, the rest is based on imported copper concentrate. Treatment and refining charges (TCRC) that processors like Hindalco and Sterlite get, depend much on the world supply situation of concentrate. Whenever concentrate supplies dwindle, miners will be putting pressure on processors to do with lower TCRC.
This year so far has been marked by a series of disruptions in the working of some of the world's largest copper mines, due to labour strife. Strikes like at the world's largest copper mine, Escondida in Chile, or earlier the eight-day stop work at Freeport-McMoran Copper & Gold's Grasberg mine in Indonesia, relate to the workers asking for a bigger share of the revenues earned by miners. Hasn't the chairman of BHP Billiton, owners of 57.5 per cent of Escondida, said not long ago about how much he wanted to have more copper in his portfolio because of the tempting returns from the metal? The good news for future supply is BHP has announced a 129 per cent increase in resource at Escondida. The challenge for BHP is to convert this newly established resource into an economically mining proposition. Meanwhile, Peruvian unions have threatened to strike work unless Lima redeems the promise to launch a pension fund for copper mine workers drawing money from mining groups and also with contributions from workers.
Chile’s Codelco experienced its first strike in two decades as its workers, fearful of the government privatising the company, are demanding a say in company restructuring. As if mine work disruptions in Chile, which had a share of 38.2 per cent of global copper exports, due to agitations by workers were not enough, Collahuasi, the world's third-largest copper mine, was paralysed for some time by heavy snowfall. South America apart, copper producers in Africa have faced demonstrations by workers. A Chinese- owned mine in Zambia was shut for two days in March, with workers demanding pay rise. All this has led Macquarie to say in a research note that "if we continue to get the same run rate of disruptions for the remainder of the year, we would have about 1.1 million tonnes of disruptions in 2011. The indications are that copper supply growth will indeed be meagre in 2011."
The foregoing remark is, however, not in sync with the observation by a metals expert with Societe Generale that most people are so very concerned with the Chilean supply problems that they are losing sight of "mine supply actually rising at a growing rate, particularly in Africa and China." Societe Generale is estimating mining supply will grow 5.2 per cent this year. Whether it is copper ore, bauxite or iron ore, China is pursuing a strategy to raise its own mine production even while imports will remain high to support capacity use by its metals units. At the same time, Africa is emerging as the new frontier for a number of minerals, where China's growing profile is seen with concern by the West.
LME copper prices hanging up around $9,800 a tonne, though below the former peak of $9,945 a tonne, are leaving producers with handsome profits. No doubt, the high prices have got much to do with the rebound in Chinese refined copper imports, as inventories with that country fell by about a half from the March level. This has got much to do with 30 per cent fall in imports in the first half of this year. China, as it accounts for 40 per cent of the global demand for copper, moves the market in a significant way.
According to the Chinese General Administration of Customs, inbound shipments of copper in June were 178,638 tonnes against 149,235 tonnes the month before. China watchers are betting on a "gradual recovery of imports" in the current second half. However, the ruling high prices and past negative arbitrage are likely to limit imports till August end. The market is also drawing inspiration from major falls at Shanghai Futures Exchange monitored warehouses and also bonded warehouses.
A Reuters survey projects this year’s average copper prices at $9,570 a tonne. The caveat here is the survey was done ahead of the euro zone leaders agreeing to ease lending terms to Greece, private investors accepting voluntary swapping of Greek bonds for longer maturity paper at lower interest rates and the $3-trillion deficit reduction deal gaining traction. What should also help copper prices is better than expected showing by the US industrial sector. After all, the US is the world's second-largest user of copper next to China which recorded a 14.3 per cent year-on-year growth in industrial value added output in the first half.
