Andy Home: Grasberg disaster shows fragility in copper supply chain

Copper markets are used to sudden supply disruptions, but the events that occurred at Freeport-McMoRan’s Grasberg Mine in Indonesia were unprecedented in their scale and impact.

Grasberg, after Escondida mine in Chile, is the second largest copper mine in the world. The 815,000 tons of copper produced last year represented 4% of the global output.

The events that took place in Block Cave on the evening of September 8 were the stuff of nightmares. A massive 800,000-ton rush of mud erupted in the mine and spread rapidly, blocking all access routes.

Two workers died. The company has suspended all mining activities while it searches for five other missing workers.

Freeport's best estimate is that Grasberg could return to its pre-accident rates of operation in 2027.

Freeport's declaration of force majeure, last week, was a major blow to a supply chain that is already overstretched. The London Metal Exchange copper rate soared to a 15 month high of $10 485 per ton.

COUNTING COST

Freeport anticipates that the other parts of Grasberg not affected by the accident will be able to resume operations in the middle of the 4th quarter. The Block Cave mine could ramp up in the first half next year.

The fourth-quarter copper production is expected to be "insignificant", and the sales forecast for next year will have been reduced by 35%.

Benchmark Mineral Intelligence analysts estimate that the cumulative loss between September 8, 2018 and 2026 will amount to almost 600,000 tonnes of copper.

BMI reported that the output decline in the fourth-quarter alone would be equal to the forecast production for next year at Collahuasi – the world’s third largest mine.

These are very early assessments. Freeport will prioritize finding the missing workers. Unknown is the extent of damage to the infrastructure at the mine. It is important to investigate what went wrong.

Freeport's block mining at Grasberg has been going on for decades, but this disaster is the first time it has happened.

It is possible that the timeline for full recovery could be extended.

SHORTAGE OF SUPPLIES

The Grasberg event has changed the global copper supply landscape.

BMI's expected market supply shortage for 2026 has increased from 72,000 to 400,000 tonnes.

Citi also revised their global market balance estimates. They project a similar size deficit in 2026, and an additional 350,000 ton shortfall in the year 2027. This is unless prices increase significantly in order to encourage more supply.

It is possible that the flow-through into the refined segment could be quicker than it would be with a normal mine production strike.

Grasberg supplied copper concentrates for a 340,000 ton per year smelter/refinery in the United States and exported all of the remaining.

The raw material exports had already been scheduled to cease in October, to make way for feed to the new Manyar Smelter. This smelter was due to reach its full capacity of 480,000 tons per year by the end this year after an unavoidable delay caused by a fire.

This schedule could be in question depending on the amount of concentrate that has been stored to fuel the ramp-up.

DANGEROUS BUSINESS

Copper mining is a risky and unpredictable industry. Producers must dig deeper into the earth and face more difficult environments in order to extract the metal.

Grasberg marks the third major incident of this year.

In May, the Kakula mine of Ivanhoe Mines in Democratic Republic of Congo experienced seismic activity followed by flooding. The company has not finished pumping out the water from the worst affected area.

In July, six people died in a tunnel collapse in the El Teniente Mine of state-owned Chilean company Codelco. Causes are still under investigation.

The market is aware of copper's vulnerability in the face of such extreme events. Analysts include a disruption allowance into their supply forecasts. However, most are likely to adjust it further after the recent string of mine strikes.

Risks are becoming more concentrated, as the world is dependent on a few megamines to maintain production growth.

BMI estimates the 20 biggest copper mines in the world will account for 36 percent of global production this year. Each of these mines faces a unique mix of geological and operational challenges, as well as social ones.

As the stock market just learned, if anything goes wrong in the supply chain, it will have a huge impact. Mark Potter edited this article.

(source: Reuters)