World copper prices have been propped up by a halt in production at the world’s second largest copper mine after a fatal accident there on May 14. The Indonesian government has just told Freeport-McMoRan Copper and Gold that it cannot resume operations at its Grasberg mine complex high in the remote mountains of eastern Indonesia until an official investigation is completed into the collapse of a training cavern that killed 28 miners. The cave-in at Big Gossan, the underground part of the Grasberg complex, was the country’s worst mining disaster. A truck driver died in an unrelated underground accident on May 31.
The inquiry into the May 14 disaster will likely take at least three months. Mining companies typically have up to four weeks-worth of stocks to cover supply interruptions, so the government’s decision raises questions about how long the company can continue to supply its customers. During a strike at the mine in 2011, Freeport declared force majeure (letting it suspend contracted deliveries without penalty because of exceptional circumstances) after one month.
The company had halted all operations at Grasberg for two weeks after the first accident and had just restarted some limited work before this latest government order to shut down. At full production, Grasberg produces 220,000 metric tons of copper ore a day or about 1.5% of global copper mine output. Only BHP Billiton’s Escondida mine in Chile operates on a bigger scale. Globally, stockpiles are at a decade high, and industry forecasts are for a small surplus of supply over demand this year. The world could get by for now without Grasberg’s output. The economic slowdown in China, the world’s largest copper consumer, accounting for 40% of global demand, has come at an opportune time.
Freeport’s senior managers, no doubt, would prefer to be devoting their time to digesting two big energy acquisitions, of Plains Exploration and McMoRan Exploration, and executing their plans to double Grasberg’s output. Freeport wants to turn the mine into the world’s biggest underground mining complex once its open-pit mining, which accounts for two-thirds of current production — the pit is a mile-wide crater — stops as planned in 2016. As well as copper, the mine holds the world’s largest gold reserves.
An even longer term question is what impact the accident may have on Freeport’s negotiations to extend its contract with the Indonesian government beyond 2021. There have been long simmering local concerns that the country does not benefit sufficiently from the extraction of its natural resources. The Grasberg operation has been bit with periodic violent attacks. These have intermingled with long-standing demands for self-determination from the local Papuan population who want independence from Jakarta. It is similar to what has happened in Nigeria’s Niger delta over that country’s oil wealth, in that respect, if on a much smaller scale. Eleven Grasberg workers died in clashes with authorities during a strike in 2011 for better wages.
There is also a possibility, if a remote one, that the question of mine safety in developing nations could catch the public imagination in rich countries in the same way that manufacturing sweatshop conditions did after the collapse of a building housing several textile factories in Bangladesh and the suicides at Foxconn’s iPad- and iPhone-making plants in China. Even before the May 14 disaster, 11 Freeport workers had died in landslides at the open-pit mine since 2003. The workers’ union, which represents 18,000 of the 24,000 workers at Grasberg, has said its members will not return to work until the accident inquiry is complete and safety standards improved.
Nor is the issue an open and shut one for the government. It owns 9% of Freeport Indonesia, the Freeport-McMoRan subsidiary that operates Grasberg. Mining accounts for 12% of Indonesia’s economy.