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Escondida strike raises broader copper supply fears

The reaction to a strike at the world’s largest copper mine underlines the sharp reversal in fortune in one of the world’s key metals over the past four months.

Copper has jumped 5 per cent in the past two days to a two-year high after a strike at the Escondida mine in Chile raised supply fears about a market that has been starved of investment.

The dispute at the BHP Billiton mine, which produces around 1.2m tonnes of copper a year, is the latest fillip for a metal that last year underperformed the likes of zinc and iron ore until Donald Trump’s unexpected US election victory. The prospect of the White House launching a major burst of infrastructure spending, as well as signs of resilience in the Chinese economy, have pushed the copper price up 13 per cent since US election day.

Current sentiment has also been helped after a phone call between Mr Trump and China’s president Xi Jinping eased the prospect of trade tensions between the US and the world’s largest consumer of the metal.

“We think markets have yet to price in longer than expected supply shocks and better than expected economic fundamentals in China,” said Helen Lau, an analyst at Argonaut Securities in Hong Kong.

With more than two thousand workers striking over pay and benefits, the price for copper — whose role in wiring makes it a key global commodity — has been pushed higher after BHP late last week declared force majeure on copper contracts from the mine.

Analysts say the strike is also drawing attention to the potential for supply disruptions elsewhere in the copper market which, after five years of falling prices, has seen little investment in new supply.

Forecasts for supply typically incorporate an allowance of 5-6 per cent of annual production to be lost to natural causes or other disruptions. However, coming so early in the year, the Escondida strike raises the risks that those assumptions will prove too conservative.

“There isn’t structurally a shortage of copper in the market but if the world’s biggest producer goes offline for a significant period of time that changes,” said Paul Benjamin, an analyst at energy consultant Wood Mackenzie.

Last year the copper market was broadly balanced between supply and demand, with only a small 350,000 tonnes surplus, according to Wood Mackenzie. However, banks are already downgrading their expectations for supply growth this year. Analysts at Goldman Sachs, for example, cut their forecast for supply to fall 0.4 per cent instead of growing 1 per cent because of the likelihood of more industrial disputes.

If investors and traders are becoming more wary about the prospect of future supply disruptions, they say the effect of the Escondida strike is also amplified by the demand cycle in China.

The strike in Chile comes just as Chinese demand typically picks up following the new year holiday, which ended at the start of the month. The disruptions could force the market into a deficit, now rather than at the end of March as typically happens, says Max Layton, an analyst at Goldman Sachs.

“The timing of these disruptions is important,” he said.

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