Mine closure impact on global copper supply – report

The collapse of the copper price and the containment measures taken for the coronavirus pandemic are posing a significant risk to global copper mine supply and project development, Nick Pickens, research director at Wood Mackenzie said in a note this week.

Day-by-day, mining companies are announcing revised plans to comply with new restrictions.

“For now, temporary closures will be absorbed by our mine disruption allowance,” Pickens said.  “In a scenario where there are wholesale closures of mines in Peru and Chile for 15 days, we would see 1.5% wiped from global annual supply. It would take 45 days to reach our full-year mine disruption allowance.”

“At this stage, we are not assuming mine supply from these countries will stop in its entirety. However, we believe there is a significant risk that disruptions will escalate, and breach 5% this year.”

Low prices could hamper mine restarts and new projects. The copper price is currently trading below the 90th centile of the industry cost curve (223 c/lb). Temporary closures and construction deferrals have accelerated due to virus containment. However, a sustained period of lower prices could make these more permanent.

Cost deflation will help to ease margins, Pickens said.

“Our mark-to market analysis suggests that at current market oil prices and exchange rates, the 90th centile of the C1 plus capex cost curve will fall by nearly 25 c/lb when compared to 2019. Furthermore, a prolonged period of lower average oil prices will have a more extensive deflationary influence for other raw material costs, and the impact could be more significant.”

Supply disruptions, directly relating to coronavirus

In recent days, the reach of coronavirus has rapidly expanded from key regions of copper demand – China and Europe, to key regions of supply – the Americas. Peru has enforced widespread quarantine, and some mines are now thought to be on temporary care and maintenance.

“In Chile, a state of catastrophe has been declared. We have also seen temporary cutbacks and risks to suspensions in Canada, the DR Congo and Australia,” Pickens said.

In Peru, the government has taken measures to prevent the spread of the pandemic throughout the mining industry. Mining companies have been asked to only mobilise critical employees to mine sites, to implement an emergency plan adapted to the circumstances, and to ensure health protection for a 15-day period, from 19 March.

Critical employees might comprise those who work in environmental or safety functions such as water treatment plants, ground stability, tailings monitoring, underground ventilation and security, Pickens said.

This would mean that mining operations would effectively go under care and maintenance for 15 days. Large operations that have followed this measure include Cerro Verde and Constancia.

Some mining companies, such as Buenaventura, have implemented these measures at all operations. However, other companies, due to their remote location and capabilities to ensure the health of their employee, have decided to just keep slow down production.

Chile has also stepped up its response. The government declared a “state of catastrophe” starting March 19, as the confirmed cases of coronavirus continued to rise.

“This measure gives the government the capability to control the food and medical supply chains and distribution, border protection, and to enforce curfews and restrict social gatherings,” Pickens said.

“Immediately after the announcement, Codelco said it would maintain “operational continuity” for 15 days in all is units. Meanwhile, we understand Spence and Escondida’s union has asked BHP to implement stricter measures to ensure the health of its employees or shutdown,” he added.

What does this mean for global supply?

The most noteworthy announcements to date, in terms of significance to the global copper market, have been from authorities in Chile and Peru, who are both pointing to a 15-day disruption. All out closures in Peru and Chile for 15 days, would see 1.5% wiped from global annual supply, Pickens asserted.

“While this is significant, it would be absorbed by our disruption allowance. It is also not likely to be long enough to trigger force majeure on shipments.”

“In our opinion, the restrictions will need to be in place longer than 15 days. It would take 45 days to disrupt 5% of supply from these countries, equivalent to our full-year disruption allowance of just over 1.0 Mt,” Pickens said.

“At this stage, we are not assuming mine supply from these countries will stop in its entirety. The early indications are that some major companies in Peru and Chile are managing to produce under the restrictions.” 

“However, there is a worse-case scenario to consider. If the need for containment leads to wholesale lockdown of mine sites, and this Latin America disruption is replicated in Africa, North America and Australia, this would have catastrophic consequences for global copper mine supply,” Pickens said.  

“This is not currently, our base case assumption, but as we publish this Insight, there are clear signs that measures to contain the virus are likely to intensify over the coming days and weeks.”

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