Metals to head down in 2009 despite supply blips

But production snags and labour disputes may help limit falls in copper, where stocks are low

LONDON: Industrial metals prices will fall further next year as economic slowdown hurts demand, but labour disputes and other production problems may help limit falls in markets such as copper, where stocks are still low.

Several key contracts are due to expire next year at operations in top copper producer Chile, which could spark occasional upticks in prices for that metal. But for others the picture is bleaker as most already face a glut of material this year due to sinking demand in the key automobile and construction sectors. “In this economic environment, while any individual disruption may cause temporary upwards blips in prices, they will have no impact on the underlying downtrend,” said independent consultant Angus MacMillan.   

The London Metal Exchange (LME) three-month copper price reached an all-time high of $8,940 a tonne in early July.

The global financial crisis sent the market spiralling towards $4,500 and its lowest since January 2006. But prices recouped some losses on Monday, helped by news that Chile’s Escondida, the world’s largest copper mine, had declared force majeure on some deliveries.

Strikes by workers wanting a bigger slice of profits at times of historically high prices, as well as unforeseen problems such as earthquakes, snowstorms and landslides, have helped underpin most industrial metals in recent years. But now the prospect of looming surpluses has prompted calls for producers to respond by cutting output, particularly in aluminium and nickel.

China’s top aluminium maker Chalco last week said it may have to cut output because of weak prices. Despite a flurry of zinc mine cutbacks and closures, still more are needed before metal output falls. Strikes and other disruptions will not be enough on their own to alter the overall bearish picture.

Analysts estimate a shortfall in copper mine output this year of around 1 million tonnes from indicated plans due to problems such as industrial disputes, pit failures and falling ore grades. “In the current environment, even if we get the same level of disruption, we’re still looking at a reasonable surplus in copper. The same will go for most metals,” said Adam Rowley, analyst at Macquarie Bank.      

Labour contracts will expire next December at world No.1 producer Codelco’’s biggest division, Codelco Norte, as well as at its Andina mine the previous month. But there are plenty of expiries to maintain interest at comparatively smaller copper facilities and other metals before that. Swiss-based miner Xstrata also has deals coming up for re-negotiation next year in Chile, Peru and Canada.

Several of the operations where contracts run out next year have a history of industrial action, but their location might determine the feistiness of unions this time round.   

MacMillan said workers in Latin American countries might still be pre-disposed to strike, even if companies try to use tumbling prices and high production costs as bargaining chips. “From their perspective, management has been taking huge windfall profits and while prices are well off their peak, unions are not going to be awfully sympathetic,” he said.  But unions in North America would be less likely to resort to industrial action, partly because they were well paid but also because they are already in fear of losing their jobs, MacMillan said.

Aluminium smelters in the United States are among the highest cost in the world and already considered vulnerable to closure.