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Copper surges on mine closures

A halt to production at two of the largest copper mines in the world has thrown supply into doubt
February 16, 2017

Two of the world's largest copper mines have been forced to close, raising the prospect of supply fears and sending the price of the metal above $6,100 (£4,906) per tonne, its highest level in almost two years. As a result, copper-focused miners such as KAZ Minerals (KAZ) and Antofagasta (ANTO) have been on a tear, up 41 and 21 per cent respectively in the month to 15 February 2017.

The same cannot be said for BHP Billiton (BLT), which operates the world's largest copper project at Escondida in Chile. Last week, the diversified miner failed to strike a deal with workers over pay and benefits, leading more than 2,000 employees to go on strike and the company's declaration of a force majeure on copper contracts from the mine. At the time of writing, BHP had not indicated whether it would participate in government-brokered mediation talks with workers.

Before the strike, Escondida was forecast to produce around 1.2m tonnes of copper in 2017, or around 5 per cent of global supply. According to analysts, this figure is equivalent to the total annual disruption built in to supply forecasts, meaning copper could rapidly swing into a deficit.

"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 Wood Mackenzie analyst Paul Benjamin in an interview with the Financial Times.

Rio Tinto (RIO), which holds a 30 per cent stake in Escondida, has also been hit by the effective shuttering of another of its copper projects, the Freeport-McMoRan (US:FCX)-operated Grasberg mine in Indonesia. On 10 February, production from the mine halted after Indonesia decided not to extend copper concentrate export licences, in an effort to boost its domestic smelting industry.

In another sign of bullishness on copper prices - and a return to M&A for a mining group whose leverage sparked a huge divestment programme last year - Glencore (GLEN) this week announced a deal to acquire two copper and cobalt mines in the Democratic Republic of Congo for $960m.