Copper Prices to Cool Despite Chile Quake

Copper prices may have jumped after a massive earthquake hit top copper producing country Chile, but investment analysts continue to reaffirm their belief that mid-term copper prices are moderating.

By Andrea Tse , Mar 1, 2010 4:28 PM EST

(Copper prices story updated with additional comments from analyst.)

A Rio Tinto Group (RTP) ship picks up copper from the Escondida mine in Chile, in 2008.

NEW YORK (

TheStreet

) -- Copper prices may have jumped after a massive earthquake hit top copper-producing country Chile, but investment analysts have reaffirmed their predictions of moderating copper prices in the mid-term.

Copper prices earlier shot up by more than 2% on fears of copper supply disruptions in Chile. Such fears are certainly understandable, given that 20% to 25% of Chilean mining capacity was closed immediately after the earthquake, according to Waverly Advisors.

But any structural damage that the earthquake might have caused should not be enough to prevent mining operations from resuming production within days, according to Waverly Advisors. Thus, fears of copper supply disruptions and a subsequent spike in copper prices should subside within days.

"We anticipate that the supply shock caused by the earthquake in Chile will not be significant enough to change our conviction on mid-term copper prices," Waverly Advisors analyst Andrew Barber notes. "We expect that

prices will continue to moderate

due to cooling demand (particularly from China)."

Rio Tinto's copper mining operations at the Escondida mine in Chile, from 2008.

It's already been officially confirmed that two of Chile's largest mines, Rio-Tinto-owned Escondida

pictured above and

Codelco

-owned Chuquicamata, haven't been hit by any significant damage from the earthquake.

However, both state-owned copper producer Codelco and

Freeport McMoRan

(FCX) - Get Report

were reportedly facing power shortages following the earthquake. Waverly Advisors says that based on the information currently available, any delays in full copper production would be caused by power failures and perhaps transport delays stemming from fuel shortages.

The investment firm notably says it is not concerned about any political risk cropping up from the crisis; although the rebuilding process in Chile will be difficult, Waverly Advisors says it is feeling reassured by the upcoming installation of President-Elect Sebastián Piñera in office during the second week of March.

"As a conservative billionaire who is pro-business, it's unlikely that Piñera's administration will allow short-term financial needs for rebuilding to drive any dramatic policy shifts that could negatively impact foreign-investment in the mining sector," Barber notes.

Waverly Advisors currently holds two different short positions in copper on the notion that prices will decline over the next three to six months. But the firm isn't completely closed to the notion of closing out on these positions if major distortions -- such as prices above the $3.50 -- occur due to more negative production news coming out of Chile or for any other reason.

"There's a point at which it would be imprudent to remain in market," Barber says.

In general, Barber believes that copper is not sustainable at the $3 level as China continues to tighten its credit, and demand, though still robust, begins to pale compared to the previous year. Barber sees a real estate slowdown in Shanghai and the central highland region, as well as a slowdown in new factories.

At the close of the day, copper for May delivery was climbing about 6 cents, or 1.9%, to about $3.35 on the Comex division of the New York Mercantile Exchange. Earlier copper rose by as much as 7 cents to $3.36.

-- Reported by Andrea Tse in New York

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