COPPER - STRUCK GOLD, NOW STRIKING!

Yesterday, another trade union at a Chilean copper producer – the Codelco's Suplant union at Andina mine went on a strike. This is over and above two more unions at Codelco already striking.

Thankfully, BHP made a pre-emptive move to prevent a strike at the world’s biggest copper mine, Escondida, also in Chile, by making a deal with the workers. If this mine had gone ahead with the strike, then there would have been serious supply disruptions as last year, its output was 1.2 million metric tons.

Another mine in Canada, has stopped work due to the raging forest fires. A group of workers at the Japanese-owned Caserones also struck last week, demanding improved pay.

One more crisis is brewing in the MMG mines in Peru where the residents have blocked the road which carries the ore from the Las Bambas copper mine. There was a two-week truce but now it stands broken as the workers say that the company does not want to participate in dialogue to solve the conflict. Las Bambas produces 400,000 tonnes of copper a year and is one of the largest mines in Peru, which is itself the world’s No. 2 producer of the metal.

Trade unions across the world at copper mines want a part of the spoils which the copper managements enjoyed last year after copper prices rose to a never-before-seen level.  Last month, Codelco posted earnings of $3.8 billion for the first half of the year, a tenfold increase from a year earlier.

Copper prices on the London Metals Exchange (LME) rose consistently to a multi-year high of $10,747/t on 14 May from $7,784/t at the beginning of this year and closed the first half at $9,435/t. Prices had fallen to a multi-year low of $4,371/t on 20 March 2020 as the pandemic took hold from a high of $6,343/t on the first trading day of 2020 on 8 January. They then rebounded to $5,943/t on 26 June 2020.

And till date in the month of August, copper prices on the LME have been gently bobbing around an average of $9500/t.

All these are major supply disruptions and indicators are that the price of the red metal is expected to rise once again but not to the levels seen in May. Reasons:

• Speculative interest on the metal exchanges in the metal is very low
• Fund positioning is low on the LME, the CME and the Shanghai markets
• Macro headwinds have overtaken the metals micro dynamics – China’s stimulus-fueled growth us winding down amid increasing Delta variant.
• China’s refined copper imports fell for the fourth straight month in July.
• Increased availability of scrap metal

USA’s proposed $1 trillion Infra Bill is expected to boost copper demand by 3% or 80,000 tonnes per year over the next five year. The copper prices could see a perk up once this Bill is passed.

But the underlying truth is that copper prices are inextricably linked to China. Unless China shows signs of bouncing back, getting onto the recovery track, despite these supply constraints, price of copper might not cross $10,000/t.

What does this mean for the stock market? We need to track Vedanta and Hind Copper under this sector and as per our Editor, SP Tulsian, both are great buys on decline and it you already have it, hold on.