Escalating strike activities at Freeport´s Grasberg mine

Strikes are becoming an increasing fact of life for mining companies all over the world. Unions are demanding more social services, better working conditions and higher pay. Analysts are concerned that continuing stoppages – mainly caused by strikes at mines in developing nations – could lead to supply shortages in certain commodities. The supply situation will remain tight in many sectors, unless the world economy tips into recession again. This supply tightness is bullish for many commodity prices.

This past week thousands of mine workers in Indonesia erected road blockades in an effort to halt production at the Grasberg Mine, situated in the east of the country. The Grasberg mine is one of the largest gold and copper deposits in the world, and is operated by American mining giant Freeport-McMoRan. 90% of the company's workers are on strike – demanding better pay, which they say should be based on international standards. Indonesian miners receive an average hourly wage of between $2 and $4. The international average is between $17 and $40 an hour. Freeport-McMoRan's management has already tried to stamp on such demands by stating that the company is facing ever-increasing infrastructure costs in the remote province of Papua (where Grasberg is located). For this reason, the company claims that the employees' claims are utopian. In the past week there were five deaths among striking mine workers, after the protests turned into violent clashes with local police. It is the second strike at Papua's Grasberg mine this year, following an eight-day strike in July.

Incidents of this kind are no longer isolated cases in the mining industry. Moreover, important mining countries such as Peru, Bolivia, Chile, Ecuador and South Africa were rocked by waves of huge strikes earlier this year, which spread from the mining industry to other economic sectors. South Africa is one of the world's largest producers of gold, platinum, palladium and diamonds, with escalating strike activities leading to production shutdowns over and over again in recent months. Many people are asking why the share prices of exploration and mining companies are not gather steam on global stock exchanges, since most commodity prices have risen substantially over the last two years (though they have corrected down in the last few months). One of the reasons may be concern about escalating strike activities, which can reduce mining profits. Freeport-McMoRan lost over $30 million as a result of the eight-day strike at Grasberg in July. In addition, deposits of highly-desired metals are being found at ever-greater depths – sometimes as deep as 6,000 metres (19,685 feet). Production costs of $1,600 per gold troy ounce are thus no longer the exception but the rule in South Africa – where deep mining is particularly common. This is another reason why, despite the rising gold price, many miners share prices are lagging.

Soaring costs for exploration and mining activities are weighing on the earnings outlook for many mining companies. For mines in developing nations, this has been compounded in recent weeks by the resurgent US dollar – which has led to losses courtesy of exchange rate differences. All of these factors are supply pressures, and something that will add further upward impetus to the prices of many commodities.

Roman Baudzus

Originally published on Goldmoney.com here