- Copper Shorters Beware! A WSJ Article Saying One Hedge Fund That Owns over Half the LME Inventory & A Couple of Very Notable Upcoming Strikes: Over the weekend we see headlines for a few looming mine strikes that could materially affect copper supply for the balance of this year (see below BHP/Glencore/Teck's Antamina, and FCX's Grasberg). That coupled with an interesting WSJ Article revealing a hedge fund is making a sizeable bullish bet is adding some tailwinds to the copper price this morning. The supply side risk (the strikes) comes at a time where global copper inventories are very low and trending lower. The global copper market is 20Mt+/year by comparison.
- WSJ Article Raising Some Eyebrows Writing that a "Single Firm Holds More Than 50% of Copper in LME Warehouses". We note that at ~160kt versus the total Global Inventories of ~800kt …LME inventories represent roughly 20% of the visible total (we include Shanghai Bonded Warehouse Inventories which as you can see above is just over 500kt of the total). Here's the WSJ article this morning… "A single buyer has snapped up more than half the copper held in London Metal Exchange warehouses, giving it control over a crucial source of supply and raising concerns among traders about the potential for higher prices. On several occasions in the last month, this buyer held as much as 90% of the world's copper stored in LME-licensed warehouses, equal to about 140,000 tons, or enough to make the copper parts of the Statue of Liberty more than 1,700 times. As of Wednesday, the buyer owned between 50% and 80% of copper held in warehouses, according to the most recent exchange data. At today's prices, a 50% to 80% share of LME copper inventories would be worth anywhere from roughly $535 million to about $850 million. Although the exchange doesn't identify the owners of metals, eight traders and brokers working for different firms active on the LME said they believe Red Kite Group, a London hedge-fund manager that focuses on metals trading, was the one buying. One of the brokers said that when he needs to buy copper for clients, contacts in the market refer him to Red Kite, indicating the fund is sitting on a large pile of metal. Red Kite declined to comment. Banks often hold large portions of the metal in LME-licensed warehouses on behalf of clients, but a hedge fund holding that much copper is less common, traders and brokers say. The London Metal Exchange, owned by Hong Kong Exchanges & Clearing Ltd. , doesn't limit how much metal a single trader may hold in its warehouses, and says that it has mechanisms in place to prevent market squeezes—a situation in which holders of a large share of the supplies use their position to jack up prices. For example, it requires a company with a dominant position to lend metal for short periods and it caps the amount of money that can be charged for that service. "The LME constantly monitors its markets to ensure that trading is orderly," a spokeswoman for the LME said. The LME's "lending guidance" system "is the most effective way to manage pressure arising from dominant positions in our market." Prices ticked higher last week in response to positive economic news from China, the world's biggest consumer of the metal. They remain below their levels at the start of the year because demand has been sluggish and production capacity is expected to increase. The official price of copper for delivery in three months on the LME was $6,696 on Friday. The metal's owner could be wagering that global copper supplies will tighten, causing prices to shoot up, analysts say. The price of copper traded on the LME is used as a global benchmark, and metal users rely on the exchange's warehouses for emergency supplies. If one firm owns most of that spare supply, it can charge higher prices to buyers, analysts say. "There's no reason for anyone to be holding 70% of the stocks of the commodity," said Jessica Fung, head of Commodities Metals at BMO Capital Markets. Established in 2004, Red Kite is now run by two of its founding partners, Michael Farmer and David Lilley, both alumni of the German industrial conglomerate Metallgesellschaft AG, which collapsed in 1993. The fund is known for its bold and extremely profitable trades involving copper, as well as other metals. Red Kite Group manages $2.3 billion, according to its website. A single firm has owned at least 50% of the copper in LME-licensed warehouses for much of the last four months. Accumulating such a dominant position became easier in June because the amount of metal under the exchange's watch had plummeted, as had prices. The warehouses have held less than 160,000 tons of copper since mid-June, compared with more than 360,000 tons at the start of the year. Some analysts say copper production is running behind demand, forcing some users to draw on stockpiles in LME-licensed warehouses. Some traders say the concentration of so much copper under one firm's control is already driving up prices. It costs about $72 more per ton to buy copper for delivery today than for delivery in three months. Others say copper is more expensive because miners aren't meeting global demand. The LME's regulatory function has come under intense criticism from aluminum buyers, who have complained of long waits and high costs to get supplies out of certain warehouses. The exchange has responded by changing its rules."
- Exclusiva Latam: A few things below that our Latam Mining Desk are watching from overnight…..
1. Antamina Union prepares for strike on November 10. Workers at Antamina mine prepare for an indefinite strike on November 10, as talks with company officials to renegotiate a labor contract that expired on July 24 have been unsuccessful. A strike at Antamina mine would be unprecedented. Union leaders demand better labor conditions and a special bonus to offset a decline in workers' earnings participation, which came as a result of lower production volumes driven by a decline in ore grades. Antamina said in a statement that it hasn't been formally notified about the strike. According to union Secretary Jorge Juárez, the decision will be officially presented to the company and the Peruvian Labor Ministry on Monday 27 or Tuesday 28 of October. The union represents 1,630 from a total of 2,860 workers. Mr Juárez noted that copper grades at Antamina have declined to 0.8% from 1.6% last year. Antamina is controlled by BHP Billiton (33.75%) and Glencore Xstrata (33.75%). Teck holds a 22.5% stake on the mine while Mitsubishi Corp. has a 10% participation. Copper production in Perú has been unable to continue increasing since last June, when it reached a LTM record of 1,424k tonnes, in part due to the production decline at Antamina and ramp-up delays at Toromocho, which has produced 26.7kt in 2014 through August. Antamina produced 30.4kt of copper in August, down from 47.5kt YOY but up from 28kt in July. Antamina officers expect copper production to recover in the medium term. (Source: Reuters, El Comercio, Gestión)
2. Implications to the Copper Market: We model Antamina to produce 80,500 tonnes of copper and 55,800 tonnes of zinc in Q4 (100% basis). So every strike day takes out 884 tonnes of copper and 613 tonnes of zinc from the market
Source: Ministerio de Energía y Minas, Perú
2. Minera Escondida union no.1 awaits ruling from the Appeals Court in Antofagasta, as the company presented a recourse looking for legal protection following the union's decision to promote two days of labor stoppages on September 22 and 24. The union claimed that the stoppages were used as warnings to the company, considering that it has failed to comply with Chilean law and violated workers' rights. The Court of Appeals in Antofagasta has 5 to 15 days (from October 30 through November 14) to determine if the stoppages should be considered illegal –as the company seeks – or not. (Source: Minera Escondida News Blog, Minería Chilena). Interesting to see that the two largest copper mines in Chile (Escondida) and Peru (Antamina), both owned partially and operated by BHP Billiton, have been facing labor problems lately.
3. Chilean government initiatives to unblock mining investments to focus on mid-to-small sized projects. According to Diario Financiero, the list of mining projects that the Chilean government plans to prioritize by helping them solve pending licenses includes mainly medium and small mining projects. The government plan is to accelerate approval for projects which have been delayed due to slow and complex bureaucracy. In Chile it is estimated that a mining project requires over 210 permits, each of them taking on average more than 100 days to be granted. Diario Financiero notes that the list of mining investments to be prioritized by the government have a total amount of US$2.7B, an amount that could increase by including Codelco's structural projects. Yet, it seems to consider only a relatively small fraction of Cochilco's list of up to $105B in potential mining investments in the country. The list includes Capstone's Santo Domingo –which is still looking for permits for the Chañaral port – and BHP's Cerro Colorado. Some local industry experts consider that expediting bureaucracy will do little to make new mining investments in Chile more attractive for mining companies, as they still have to consider the increase in taxes, high energy costs and increasing labor uncertainty due to the pending labor reform. (Source: Minería Chilena, Diario Financiero).
- Copper Supply-Related: Freeport's Grasberg to Strike for a Month? In addition to the potential for an Antamina Strike on November 10th (see above)… a Reuters article this morning saying that workers at Freeport's Grasberg Mine are threatening to go on strike for a month starting on November 6th because the company has failed to make changes to local management following a fatal accident. Earlier this month, hundreds of angry protesters blocked access for two days to the open-pit area of the Grasberg complex, where production was temporarily suspended following the death of four workers on Sept. 27.
Impact to FCX? Orest Wowkodaw (Sr. Base Metals Analyst – Scotiabank) saying this morning that should this actually take place… a one-month strike in Q4 for FCX represents ~38kt of copper on a 100% basis, and represents about 8% of FCX's consolidated production. The impact to our Q4/14 EBITDA estimate for FCX is $144 million, or ~6%, while the impact to our EPS estimate is $0.06, or ~8%. Orest adds that he thinks the strike is a 50/50 scenario due to the contentious issue of worker safety and the recent poor track record of accidents at Grasberg.
…Freeport, BHP Pushed to Give Water to Chile Residents in Drought…: Chile's government has introduced legislation that would redistribute water rights to consumers and awayfrom mines, without compensation, during water shortages. As Chile's copper industry has expanded, mining companies such as BHP Billiton and Freeport-McMoRan have had to compete with residential demand for scarce water resources. This is the fourth such water oversight legislation introduced in the past year by President Michelle Bachelet's government.
…and Copper Strikes May Go Viral After Proposed Change in Chile's Labor Law…: Chilean workers have been granted the right to join forces with counterparts at other subsidiaries to renegotiate labor conditions with their parent company. Because of the change in the law, labor disputes that in the past would have involved a single mine now have the potential to spread to all of a company's mines. This could affect Anglo American, Antofagasta and Freeport-McMoRan, as well as other operators of multiple copper mines in Chile. After doing some of his own digging, Scotiabank LatAm Materials Analyst Alfonso Salazar notes that the proposed labor reform is still under analysis and could be proposed to the Chilean Congress in late November; as such Alfonso notes that there could be some changes before it gets to the Congress for review and approval, and the timing is uncertain.
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