Chile’s copper mines under threat from virus spread, copper price jerks upwards

When copper trading closed at the London Metal Exchange on Tuesday, the red metal for a three-month delivery contract sat at US$6,188 per tonne.

That shows the price is closing in on pre-COVID-19 levels.

The metal hit US$6,346/t in January, then slumped in March to a low for 2020 of US$4.371/t. We are now seeing predictions of it hitting US$7,000/t.

On the other hand, with copper spot prices being higher than three-month contract ones — an indicator that some traders expect the price to fall — Fitch Solutions is predicting an average US$5,900/t for the remainder of 2020.

But Fitch also allows that the easing of lockdowns around the world will buoy copper demand.

Volatility will characterise copper trading in the next few months as the virus and global economic worries weigh on the markets.

What’s impacting the copper market?

The copper market is being driven by three factors.

One is that Chile’s output of copper is under threat due to the COVID-19 pandemic. By last weekend, the country had the seventh largest infection count in the world with 285,000 people testing positive and almost 6,000 deaths.

More to the point, Codelco, the state-owned copper miner and largest single contributor to the Chilean economy, has confirmed that 2,433 of its staff have contracted the virus.

The second factor is that China seems to be on a spending spree in commodities, driven by reviving economic activity there and a pumped-up equities market boosted by liquidity (if not fundamentals) following stimulus moves, with the Shanghai and Shenzhen market indices hitting a five-year high on Monday.

Chinese copper demand increased 4% in the second quarter.

The third factor is more on the conjecture side (although widely discussed): that China is stockpiling a range of raw materials for fear of escalating political tensions leading to supply chain disruptions.

Chile in precarious situation due to COVID-19

As for Chile, the situation is on the edge.

COVID-19 has hit especially hard in the cities that act as service centres for mining companies operating in northern Chile, particularly in Antofagasta and Calama.

Chile derives 15% of its gross domestic product from mining — more crucially, mining generates half the country’s export income. Slowing or cutting off much economic activity will be a hideous blow.

Last month, Chile’s central bank, Banco Central de Chile, said the coronavirus had dealt the country’s economy the worst blow in 35 years.

The bank expects the economy could contract by as much as 7.5% this year — the worst outlook since the Latin American debt crisis that raged between 1982 and 1989 and is known in the region as “the lost decade”.

Codelco imposes health restrictions, suspends construction

Codelco has halted expansion work at the El Teniente mine. The expansion was aimed at increasing the mine life of the project; suspending that work will enable the company to reduce its workforce there by about 4,500 (Codelco employs around 70,000 people in its Chilean mines). It said that the fewer people on site would help reduce infection rates.

Its other mine sites have now seen tough health restrictions imposed.

Codelco has also suspended all construction projects at its operations in northern Chile, including the new US$5 billion Chuquicamata underground mine.

Unions have been urging labour protests and stoppages unless copper companies take more action to protect workers and their families.

Last week a delegation of mayors from northern Chile met parliamentarians in Santiago and asked for the government to close down all mining to stop the spread of the virus.

One mayor, Daniel Agusto of Calama — a city of 180,000 people located within the copper mining region — claimed that 45% of COVID-19 cases in his area are from the mines. Another northern mayor said 90% of the infections in his town were connected to mining operations.

Copper concentrate supplies to tighten

BMO Capital Markets, an arm of the Bank of Montreal, says the copper concentrate market will tighten further this year.

“With [Chile] now having one of the worst COVID-19 infection rates in the world and thousands of cases across the domestic mining industry, pressure from mining unions and politicians alike for mining companies to curtail operations is rising,” it said in a client note.

But Codelco is not the only company in the spotlight.

Last week BHP Group (ASX: BHP) announced it would be ramping down activity at its northern Chile-based Cerro Colorado mine, an operation that produces more than 71,000t of copper a year.