Disruptions tighten copper supply, surplus narrows

Fri May 24, 2013 9:10am EDT

* Copper surplus forecast at 98,500 T in Reuters April poll

* Some analysts scaling back forecasts after mining problems

* Potential for labour strife in Chile ahead of elections

By Melanie Burton and Eric Onstad

SINGAPORE/LONDON, May 24 (Reuters) - A series of copper mine shutdowns and supply logjams has prompted some analysts to scale down forecasts for a market surplus, but it would take more disruptions to swing the market into a deficit.

"People are making adjustments, we certainly are. At the beginning of the year we were pencilling in a 300,000 tonne surplus. That's probably going to be pegged back by half or so," analyst Robin Bhar at Societe Generale in London said.

"Demand is down as well, so one offsets the other. I don't think we'll have a deficit market again but certainly a more balanced market."

The forecast surplus has weighed on benchmark copper prices , which have shed 13 percent since touching a peak in February of $8,346 a tonne for the year so far.

The global market for refined copper was expected to have a 98,500 tonne surplus this year and 305,000 tonnes in 2014, based on the average forecast of 18 analysts polled by Reuters in April. The 2013 estimate was already scaled back from a 127,000 tonne surplus forecast in January.

Those April forecasts came shortly after a rockslide at Rio Tinto's Bingham Canyon copper mine, which the company said would reduce production by about 100,000 tonnes.

But they were made before the world's second-biggest copper mine, Grasberg in Indonesia, shut this month after a tunnel collapse killed 28 workers. Owner Freeport McMoRan Copper & Gold has said it will not reopen the mine until it is certain conditions are safe.

On top of mining issues, plants in China, the world's top producer of refined metal, have been cutting back capacity due to a shortfall in the scrap metal they use as a feedstock, while India's top two smelters have been shut due to pollution concerns.

Because copper production often falls short of forecasts due to mining accidents, labour disputes, ore degradation or power shortfalls, analysts typically factor in a production disruption level of between 800,000 to 1 million tonnes, around 4 to 5 percent of the 21 million tonne market, Leon Westgate at Standard Bank in London said.

"I think people cut that (disruption rate estimate) significantly this year in expectation the industry would get its act together," he said.

"The year started well, but a drip feed of disruptions has started to build over the past couple of months," Westgate added. He has not yet revised his forecast for a 150,000 tonne surplus this year, however.

STOCKPILES AT GRASBERG

At Grasberg, a trade union official said all investigations into the tunnel collapse must be completed before workers return.

"If they have found a problem in the rock mechanics, they're going to have to do something about it before they send people down the mine shaft again. This may take some time," said Matt Fusarelli at consultancy AME Group in Sydney.

Since Grasberg has ore stockpiles, many analysts including Fusarelli have held back from revising forecasts of its output. "But we are obviously watching it, and it's probably more likely than not that we will see lost production."

Sanjay Saraf, head of base metals research and forecasts at Thomson Reuters GFMS, said the consultancy has built in 420,000 tonnes for disruption for the remainder of the year, which is equivalent to around eight to 10 months of output from Grasberg.

"But there will undoubtedly be further disappointments elsewhere in the coming months, so we could well see this allowance being tested," Saraf told the Reuters Global Base Metals Forum.

GFMS forecasts a copper surplus of 232,000 tonnes this year.

"You've also got the Chilean presidential elections in November, so you may see there is the potential for an increased frequency of industrial action, and also with elections in Indonesia," Westgate said.