Supply Threats Revived as Freeport Layoffs Spur Copper Rally

(Bloomberg) -- Copper-supply threats are back on investor radars as rising labor tensions at the world’s second-largest mine helped push up prices that had been beaten down by demand concerns.

Copper rose to a three-week high in New York Thursday after a union-affiliated group reported that about 2,000 striking workers had been laid off at Freeport-McMoRan Inc.’s Grasberg mine in Indonesia. The Phoenix-based company later confirmed that “a large number” of the 4,000 people who have failed to report to work are now “deemed to have resigned.” Freeport shares fell.

The labor tensions at Grasberg throw a spotlight back on supply-side challenges, thereby easing concern about slowing demand. Some workers downed tools on May 1, just as the mine was preparing to ramp up and resume exports as part of a short-term deal with the government as talks for new contractual terms continue.

“Laying off workers doesn’t make it seem like the mine’s going to suddenly bounce back and start hitting production capacity,” Leon Westgate, an analyst at Levmet UK Ltd., said by telephone. “We seem to have had a bit of a delayed reaction to the Grasberg news, and a knee-jerk response in other metals.”

Copper futures for July delivery gained 0.5 percent to settle at $2.5975 a pound at 1:19 p.m. on the Comex in New York on Thursday, after touching $2.6195, the highest for a most-active contract since May 3. Prices slipped 0.2 percent on Friday, and are up 3.5 percent this year, extending last year’s 17 percent climb that was the steepest in six years.

Providing further support to prices, inventories tracked by the London Metal Exchange have fallen while U.S. equities extended their rally to fresh records amid growing confidence in American consumers’ ability to jump start economic growth.

‘Working Normally’

More striking Grasberg employees may be deemed to have resigned if they don’t return to work in accordance with labor rules and agreed industrial-relations guidelines, spokesman Eric Kinneberg said by email Thursday.

The local union has said the strike will continue through June, a month longer than initially planned. It has also said 10,000 unionized workers are on a strike, a number Freeport disputes.

“The union’s figure is the approximate membership of union employees (excluding contractors),” Kinneberg said. “However, the majority are not participating and are working normally.”

Even so, mining and milling rates have been affected by the labor disruptions, he said, without providing details. 

PT-FI, Freeport’s Indonesian unit, also has about 20,000 contractors. The unit is taking steps to mitigate the impact by re-allocating resources, training additional workers and supplementing its mill throughput with stockpiles, Kinneberg said.

In an online statement Wednesday, IndustriAll Global Union, a Geneva-based umbrella organization affiliated with the local union at Grasberg, said more than 2,000 striking permanent workers have been sent voluntary resignation notices. 

Close to another 8,000 workers are on strike at the site, Glen Mpufane, mining director at IndustriAll, said in a telephone interview Thursday from Geneva.

Intervention Sought

IndustriAll’s General Secretary Valter Sanches has written to Freeport twice this month, urging the company to avoid a social disaster in Papua province that could result in violence. The group has also written to the Indonesian president asking for intervention.

Freeport has been locked in a protracted dispute with the Indonesian government over the long-term conditions under which it operates. The conflict led to a ban on concentrate exports in January, which only resumed in April.

On Wednesday, Freeport’s local unit there said it’s on track to meet its output target, even as workers extended the strike at the operation for another month. Local spokesman Riza Pratama said Friday that the company would continue to increase production to the “optimum limit, while maintaining safety and a high standard of work ethics.”

However, workers on the ground have told the global union that the ore stockpile is decreasing significantly as a result of the strike, Mpufane said. IndustriAll is pushing for arbitration between the local union and PT-FI, he said, adding that no talks between Freeport and workers are under way.

“Unions have a right to exist in Indonesia,” he said. “You cannot wish them away.”

Freeport fell for the first time in five days Thursday, losing 1.7 percent. The stock is down 11 percent this year after surging 95 percent in 2016.

--With assistance from Mark Burton and Fitri Wulandari

To contact the reporters on this story: Danielle Bochove in Toronto at dbochove1@bloomberg.net, Luzi Ann Javier in New York at ljavier@bloomberg.net.

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net, Steven Frank