On April 20, Minmetals Resources Co., Ltd. (MMG) announced on the Hong Kong stock exchange that the lasbambas copper mine under the company would not be able to maintain production because local community personnel in Peru entered the mining area to protest. Since then, local protests have escalated. In early June, Peruvian police clashed with several communities in the mine, and the production of lasbambas copper mine and loschancas copper mine of Southern Copper Company was suspended.

On June 9, local communities in Peru said that they would lift the protest against lasbambas copper mine, which forced the mine to stop operation for about 50 days. The community is willing to give a rest on the 30th (June 15 – July 15) to carry out a new round of negotiations. The local community asked the mine to provide jobs for community members and to reorganize mine executives. The mine said it would resume some mine activities. Meanwhile, 3000 workers who had previously stopped working for MMG contractors are expected to return to work.

In April, Peru’s copper mine output was 170000 tons, down 1.7% year-on-year and 6.6% month on month. In the first four months of this year, Peru’s copper mine output was 724000 tons, a year-on-year increase of 2.8%. In April, the output of lasbambas copper mine decreased significantly. Cuajone mine, owned by Southern Copper of Peru, was shut down for nearly two months due to local community protests. From January to April this year, the copper production of lasbambas mine and Cuajone mine decreased by nearly 50000 tons. In May, more copper mines were affected by the protests. Since the beginning of this year, the protests against copper mines in Peruvian communities have reduced the output of copper mines in Peru by more than 100000 tons.

On 31 January 2022, Chile adopted several proposals. One proposal calls for nationalization of lithium and copper mines; Another proposal is to give a specific period to the mining concessions that were originally open-ended, and to give five years as a transitional period. At the beginning of June, the Chilean government launched the sanctions procedure against the lospelambres copper mine. The Chilean environmental regulatory authority made allegations on the improper use and defects of the company’s Tailings emergency pool and the defects of the accident and emergency communication agreement. The Chilean environmental regulatory agency said that the case was initiated due to citizen complaints.

Judging from the actual output of copper mines in Chile this year, the output of copper mines in Chile has decreased significantly due to the decline of copper grade and insufficient investment. From January to April this year, Chile’s copper mine output was 1.714 million tons, a year-on-year decrease of 7.6%, and the output decreased by 150000 tons. The rate of output decline tends to accelerate. The national copper Commission of Chile said that the decline in copper production was due to the decline in ore quality and the shortage of water resources.

Economic analysis of copper mine production disturbance

Generally speaking, when the copper price is in the high range, the number of copper mine strikes and other events will increase. Copper producers will compete at a lower cost when copper prices are relatively stable or when electrolytic copper is in surplus. However, when the market is in a typical seller’s market, the supply of copper is in short supply and the supply is rising rigidly, indicating that the copper production capacity has been fully utilized and the marginal production capacity has begun to have an impact on the copper price.

The global futures and spot market of copper is regarded as a perfect competitive market, which basically conforms to the basic assumption of perfect competitive market in traditional economic theory. The market includes a large number of buyers and sellers, strong product homogeneity, resource liquidity, information completeness and other characteristics. At the stage when copper supply is in short supply and production and transportation begin to concentrate, factors conducive to monopoly and rent-seeking appear near the upstream link of the copper industry chain. In Peru and Chile, the major copper resource countries, local trade unions and community groups will have more incentive to strengthen their monopoly position through rent-seeking activities in order to seek unproductive profits.

The monopoly manufacturer can maintain the position of sole seller in its market, and other enterprises cannot enter the market and compete with it. Copper mine production also has this feature. In the field of copper mining, monopoly is not only manifested in the high fixed cost, which makes it difficult for new investors to enter; It is also reflected in the fact that the exploration, feasibility study, plant construction and production of copper mine will take several years. Even if there are new investors, the supply of copper mine will not be affected in the medium and short term. Due to cyclical reasons, the perfect competitive market presents the characteristics of phased monopoly, which has the nature of both natural monopoly (a few suppliers are more efficient) and resource monopoly (key resources are owned by a few enterprises and the state).

The traditional economic theory tells us that monopoly mainly brings two harms. First, it affects the normal repair of the supply-demand relationship. Under the influence of rent-seeking and monopoly, the output is often lower than the output required for the balance of supply and demand, and the relationship between supply and demand has been distorted for a long time. Second, it leads to insufficient effective investment. Monopoly enterprises or organizations can obtain benefits through rent-seeking, which hinders the improvement of efficiency and weakens the enthusiasm to increase investment and expand production capacity. The Central Bank of Peru reported that the amount of mining investment in Peru decreased due to the impact of community protests. This year, the amount of mining investment in Peru decreased by about 1%, and it is expected to decrease by 15% in 2023. The situation in Chile is similar to that in Peru. Some mining companies have suspended their mining investment in Chile.

The purpose of rent-seeking is to strengthen monopoly behavior, influence pricing and profit from it. Because of its relatively low efficiency, it inevitably faces competitor constraints. From the perspective of longer time and global mining competition, the price is pulled higher than the balance of supply and demand (under the condition of perfect competition), which provides high price incentives for new manufacturers. In terms of copper supply, a typical case is the increase in capital and production by Chinese copper miners. From the perspective of the whole cycle, there will be a major shift in the global copper supply landscape.

Price outlook

Protests in communities in South American countries directly led to the decline of copper concentrate production in local mines. By the end of May, copper mine production in South American countries had decreased by more than 250000 tons. Due to the impact of insufficient investment, the medium – and long-term production capacity has been restrained accordingly.

Copper concentrate processing fee is the price difference between copper mine and refined copper. The copper concentrate processing fee dropped from the highest $83.6/t at the end of April to the recent $75.3/t. In the long run, the copper concentrate processing fee has rebounded from the historical bottom price on May 1 last year. With more and more events affecting the copper mine output, the copper concentrate processing fee will return to the position of $60 / ton or even lower, squeezing the profit space of the smelter. The relative shortage of copper ore and copper spot will prolong the time when the copper price is in the high range (the Shanghai copper price is more than 70000 yuan / ton).

Looking forward to the future trend of copper price, the progress of global liquidity contraction and the actual situation of inflation are still the leading factors of copper price stage by stage. After the US inflation data rose sharply again in June, the market waited for the Fed’s statement on sustained inflation. The “hawkish” attitude of the Federal Reserve may cause periodic pressure on the copper price, but correspondingly, the rapid decline of U.S. assets also restricts the normalization process of U.S. monetary policy.