By Rosalyn Retkwa
On Tuesday morning, June 11, Global miner BHP has agreed a rise of around 3 percent in the fees it will pay to Japan smelters to process its copper concentrate in the second half, after a string of mine shutdowns cut into global supply and dealt it a stronger hand in talks.
The global copper market is expected to swing into a surplus this year after several years of deficit, but shutdowns at Indonesia’s huge Grasberg mine and a rockslide at Rio Tinto operations in Utah have unleashed a short-term scramble for concentrate supply.
The miner has agreed terms with Japan smelters at $72 a tonne, and 7.2 cents a pound, up from the January benchmark of $70 a tonne and 7 cents a pound, two sources said.
Copper went on a wild ride last week, with the benchmark three-month contract on the London Metal Exchange (LME) hitting $7,500 a ton in trading on Wednesday, but closing much lower at $7,300.75 a ton on Thursday.
The decline surprised some analysts, given the news that supply concerns will continue on two fronts. First, mines that are generally seen as huge suppliers are shutting down, and second, the supply chain remains bottlenecked.
The Freeport-McMoRan Copper & Gold’s Grasberg mine in Indonesia – the second-largest copper mine in the world – will be shut down for at least three months to investigate the mine’s second deadly accident in a month. “Freeport will be allowed to ship concentrate from its stockpile, but we doubt this inventory will last long,” says INTL FCStone metals analyst Edward Meir in his June 6 commentary.
If Grasberg really is out of commission for three months, the loss of production is going to be “very significant – a minimum of 200 million pounds, and probably more like 300 million,” says Wiktor Bielski, the London-based global head of commodities research at VTB Capital, the Russian investment bank.
The reason the Grasberg mine disaster is so significant – in an industry where many mines are aging and prone to landslides and failures – is that it was expected to deliver close to 40% of the global growth in copper this year, or an extra 700,000 pounds, with “the vast majority coming from Grasberg,” he says. There are a still a lot of unknowns, he says – for instance, the size of Grasberg’s stockpiles. But Bielski is now projecting a deficit of about 130,000 tons of copper this year. At first glance, that looks to be a tiny drop in the bucket in the context of his projected global consumption number of 20.5 million tons in 2013.
But “the marginal ton is critical,” he says, because “that has to be sourced out of inventory,” and 85% of the copper that’s sitting in inventory in the LME’s roughly 450 warehouses is stored in just three locations: New Orleans; Antwerp, Belgium; and Johor, Malaysia, where there are long queues to “load out” metal. There’s a record amount of copper in inventory at the LME’s warehouses – 614,000 tons, a 10-year high – but very little of that is actually available to consumers because such a large percentage is bottlenecked in those three warehouses, Bielski says. Even with the other 15% that’s being stored in other locations, he calculates that just 4,000 tons are ultimately available to consumers “in the whole rest of the world.”
“The squeeze is already on,” he says, adding that the only reason premiums aren’t higher is that “demand out of China hasn’t been particularly strong,” with Chinese imports about 40% to 45% lower than a year ago. But consumers who are “sitting on zero inventory” might want to build up some inventory “very, very quickly,” because they now face “a huge risk” that premiums might go to “several hundred dollars a ton, if this all starts to tighten up, as it looks like it might,” Bielski says.
Meanwhile, Southwire and Encore have joined with Novelis, the world’s largest manufacturer of aluminum cans, in filing a letter of complaint with the LME about its warehouses and the long queues. The warehouses are owned and operated by private companies, but they are under the LME’s jurisdiction.
Attorney Robert Bernstein of the New York City law firm of Eaton & Van Winkle, who is representing the three companies on this issue, declined to make the letter public. “Because correspondence with the LME is not public, my sharing the letter at this time, before the LME has responded, may be counterproductive,” he said, in an email.
The European Commission’s enterprise and industry department has done an initial investigation into the complaints, and has presented its findings to the European Union’s competition watchdog, Reuters says.
Tagged with tED