LONDON, Feb 9 (Reuters) - The copper market is facing the imminent prospect of the simultaneous closure of the world's two largest copper mines.
Strike action is due to start today at the largest, the Escondida mine in Chile.
There seems little prospect of a last-minute settlement between unions and the mine's majority owner and operator BHP Billiton. The union didn't even bother attending talks on the fifth day of statutory government mediation and the company has started shutting down operations.
In Indonesia, meanwhile, Freeport McMoRan is threatening to partly suspend operations at its Grasberg mine due to the lack of an export permit, the latest turn in the long-running stand-off between the company and the Indonesian government.
At risk is combined production of around 1.7 million tonnes, equivalent to around eight percent of global output last year.
The potential for lost production from one or both may be partly priced into the market, which is currently trading around $5,870 per tonne in London. Fund money has been steadily accumulating since copper's big upside move from below $5,000 last November.
But with copper's notoriously unpredictable supply already back in full focus this year, how well prepared is the market for significant production losses?
Because despite the much-vaunted "wall of supply" coming on stream over the last couple of years, there has been no significant rebuild of refined metal stocks on the world's exchanges.
Indeed, those registered with the London Metal Exchange (LME) are once again shrinking at a fast pace.
DOUBLE IMPACT
Escondida produced around one million tonnes of copper last year in a combination of concentrates and refined metal.
It was a relatively low production year for the world's biggest mine due to low grades. Output in both 2014 and 2015 was around 1.15 million tonnes.
Analysts are calculating a loss of around 20,000-25,000 tonnes of metal for each week of strike action.
There were strikes at Escondida in both 2006 and 2011, lasting 25 and 15 days respectively.
It's worth noting that Chilean labour laws mitigate against long walkouts since after 30 days individual union members are allowed to return to work if they chose to, shifting negotiating leverage back to management.
That may limit both the length of a walkout and the resulting production hit.
There is no such comfort for Grasberg, which is facing multiple threats.
The most pressing is the lack of an export licence for the material not sent to the local Gresik smelter for processing. With limited storage capacity Freeport has warned it will be forced to reduce drastically production to the tune of around 32,000 tonnes per month.
A temporary export licence is dependent on ongoing talks with the Indonesian government about a new operating licence, which includes provisions for investment in additional local smelting capacity and, more controversially, the disposal by Freeport of a majority stake to Indonesian investors.
Freeport has been here before. A similar stand-off with the government in 2014 cost around 125,000 tonnes of lost output.
It has also become clear that all is not well at the mine or the existing smelter either with labour unrest, or what Grasberg has termed "productivity" issues, translating into lower mine production over the back end of last year and a walkout at the smelter this year.
So clouded has become the future of Grasberg that Rio Tinto is now openly talking about walking away from its minority investment.
Just how resilient is copper's supply chain to such imminent production losses?
Not as resilient as it should in theory be given all that "wall of supply" which came on line in 2014 and 2015. Excess supply, after all, was the reason copper was bombed out below $5,000 per tonne until as recently as last November.
Exchange stocks of metal haven't rebuilt in any significant way. The combined tally across the London Metal Exchange, COMEX and the Shanghai Futures Exchange (ShFE) was 565,000 tonnes at the end of last month, little changed from 508,000 tonnes a year earlier.
The relative stability of global stocks has been masked by a convoluted shuffling of metal between the LME and China last year as two trading power-houses slugged it out across the LME spreads.
For sure, there is always more "out there" than just what is sitting in exchange warehouses but it is most likely "out there" in China, which sucked in 3.63 million tonnes of refined copper last year, only marginally off the record pace of 2015.
And right now LME stocks are once again falling fast.
The headline count of 251,525 tonnes has already dropped by 60,300 tonnes, or 19 percent, since the start of January.
That, however, only tells half the story. There are currently 111,200 tonnes awaiting physical load-out from LME warehouses, representing 44 percent of the total.
The "open" tonnage that remains is the lowest it's been since early December and that despite a low seasonal period for copper usage due to the combination of Western and Chinese new year holidays.
DEFICIT NOW?
Copper's double supply trouble is coming against a backdrop of a re-tightening market with some analysts such as Goldman Sachs predicting a return to supply deficit this year.
No-one will be rushing immediately to revise their calculations. Every copper analyst now factors in a "disruption allowance" in their supply calculations, typically around 5 percent globally.
But if both Escondida and Grasberg close, even for a relatively short period of time, a large part of that allowance will already have been used up.
And that's before the potential for further disruption.
Keep an eye on the Las Bambas mine in Peru, another big operator with 330,000 tonnes of production last year. It is facing renewed protests from local residents, who have blocked access to the mine.
It too has been here before. A similar flare-up in local tensions last year stopped shipments and almost stopped the mine.
It's shaping up to be a hot year for copper production. Whether that translates into a hot year for the copper price is going to be dependent on just how much more stock is lying in statistical darkness beyond exchange warehouses.
Because that visible safety cushion is looking a lot leaner than might have been expected.
