Workers of Chile's giant Chuquicamata copper mine gather in front of the main gate of the mine.IVAN ALVARADO
Copper prices are expected to climb this year as supply tightens and production uncertainty lingers in the aftermath of a deadly weekend earthquake in Chile, the world's top copper producer.
About one-fifth of production capacity in Chile was affected by the quake. While much of that production has resumed, the impact of the interruption on an already-shrinking global supply is expected to be longer lasting.
An estimated 50,000 tonnes of production was affected by the Chilean quake, according to BMO Nesbitt Burns Inc. global commodity strategist Bart Melek. While that's small compared to the 15.8 million tonnes of global production forecast for 2010, it's almost half of the 110,000 tonne demand surplus that is forecast.
"It's very dangerously towards a deficit. That makes markets quite tight," Mr. Melek said. "We see this as not necessarily lifting prices significantly higher in the next month or so, but we see it as basically serving as a guarantee of fairly robust copper prices down the road."
BMO predicts a copper supply shortage in 2011.
Chile's 8.8-magnitude earthquake was hardest felt in the country's south-central coast, while most of its copper mines are located in the north. State-owned Codelco, the world's largest copper producer, and giant Anglo American PLC each closed mines for several hours due to power outages and to inspect infrastructure. Other smaller mines also had production issues.
While most operations are back online and mine damage reported is minimal, concerns remain about supply disruptions as Chile begins its rescue and cleanup operations.
Those concerns caused copper prices to jump more than 5 per cent early yesterday, to their highest level in about two months, before falling back later in the day.
The London Metal Exchange cash settlement price, used in most mining contracts, was $3.33 (U.S.) a pound yesterday, up from $3.21 Friday. Copper prices on the Comex division of the New York Mercantile Exchange closed up 2 per cent to $3.35 a pound.
"The uncertainly about supply is likely to keep prices high," Bank of Nova Scotia economist and commodity market specialist Patricia Mohr said. "My guess is that copper prices will hold up very well this year; probably average higher than last year, well above $3 a pound."
She forecasts copper prices to average $3.15 this year and $3.50 in 2011, based on LME cash settlement prices.
Copper prices averaged $2.34 last year, dragged down by the global recession.
China is driving worldwide demand for copper, with consumption growing 30 per cent last year. That figure grew to 42 per cent including "strategic" stockpiling, Ms. Mohr said.
While copper inventories are currently on the high side - at about 65 days - Ms. Mohr said much of it is being "willingly held" by China to meet its growing appetite. Average stockpiling was 60 days between 2000 and 2009.
Copper, among the four best performing commodities last year in Scotiabank's commodity price index, is used in everything from construction and electronics to vehicle and industrial machinery production.
Chile's copper production is about 34 per cent of global copper production, or just under six million tonnes. Six of the world's 10 largest copper mines are located in Chile.