The Strategist

Strikes in Chile push copper prices to record high

06/08/2018 - 12:12

A strike at one of the world's largest copper deposits resulted in a rapid rise in prices. In five days, they have risen by almost 7% and after a four-year break exceeded the level of $ 7.3 thousand per ton. However, metal prices still can also drop rapidly due to speculators playing in the case of a quick agreement between the controlling shareholder and the workers of the Chilean mines.

Gobierno de Chile
Gobierno de Chile
Yesterday, the cost of copper on the London Metal Exchange (LME) rose above $ 7.3 thousand per ton for the first time since early 2014. According to Reuters, the price of a three-month futures contract for the delivery of metal reached $ 7,340 per ton, 1.6% higher than the closing value. For five days of steady growth, the metal has risen in price by more than 7%. During this period, other non-ferrous metal quotes also showed growth, although less significant, by 2-3.8%. 

The main reason for the strong price increase for copper was a strike on one of the largest copper deposits of Escondida (Chile), which is controlled by BHP Billiton. The reason for the conflict between the BHP and the employees of Escondida is traditionally the negotiations on wages. At the moment, employees demand a 5% pay rise and a one-time payment of a large bonus. According to Norbert Rücker, head of commodity research at Julius Baer, investors are concerned about stability of copper supplies from Chile's mines.

Another factor in the growth of copper prices was the positive dynamics in industrial production and fixed asset investment in China, as well as implementation of projects under the One Belt One Road Initiative, which requires creation of an energy infrastructure.

In addition, non-ferrous metals grew in price on the background of the weakening of the dollar. Yesterday, the DXY index fell to the lowest level for the last three weeks (93.2 points), which is 0.5% lower than the closing values of the Wednesday and 1.3% of the five-day old values.

Nevertheless, market participants do not expect a continued rise in copper prices, as metal stocks on exchanges are at a sufficiently high level to fill the temporary deficit. According to Norbert Rücker, negotiations between the BHP and the Chilean workers will remain a factor of uncertainty, but the development of the situation so far can be called constructive.

In the event of a quick agreement between BHP Billiton and the mine workers, copper prices may begin to fall, which will be exacerbated by the flight of traders. The current rally could also be elevated by hedge funds specializing in metal trading, which traditionally use aggressive and short-term strategies. And in case of a trend reversal, the market may face a significant correction.