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Are Copper Bulls Over-Relying on Supply Disruptions in 2018?

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Feb. 21 2018, Updated 10:33 a.m. ET

Supply disruptions

We saw a sharp rally in copper prices in December. Among other factors, expectations of supply-side disruptions at leading copper mines boosted copper market sentiment. To be sure, several labor contracts at leading copper mines—including BHP Billiton’s (BHP) Escondida—are coming up for negotiation this year. Last year, we saw labor action at several mines, including Escondida and Freeport-McMoRan’s (FCX) Grasberg, which are the world’s largest copper mines (ANTO).

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Copper bulls

Copper bulls expect supply disruptions resulting from labor action at some of the mines where contracts are coming up for negotiation this year. Going by last year’s events, the bullish argument has substance. As Richard Adkerson, Freeport’s CEO, said during the company’s 4Q17 earnings call, “This year there are a lot of labor contracts in Chile and Peru coming up and you can expect those negotiations to be challenging and it could be supported from a supply standpoint. So, Codelco has a real challenge in maintaining production. All these things are challenges for the industry but they’re supportive of supply.”

Labor contracts

However, earlier this month, Reuters reported that Codelco and Glencore (GLEN-L) have managed to sign labor contracts. It’s too early to say whether the other contracts coming up for negotiation later this year would also be signed without much fuss. Nonetheless, copper investors should keep a close eye on the upcoming labor negotiations, as they may influence copper prices (EWU)(UKX-INDEX).

In the next part of this series, we’ll look at copper miners’ 4Q17 unit cash cost progression.

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