SANTIAGO – A wage negotiation at the world’s top copper mine is showing the downside for producers of recovering prices: workers want their share.

Talks began in earnest Tuesday at BHP Billiton’s Escondida mine in Chile. In a preliminary phase of the collective-bargaining process, management rejected demands by Union Number 1 for a 7% pay rise and a bonus of 25-million pesos ($37 000), union spokesman Carlos Allendes said. Workers are scheduled to vote on a final proposal January 24. BHP didn’t provide a comment.

As the industry emerges from a glut that sank prices, the Escondida negotiations are being keenly watched by producers and investors alike.

Unions are emboldened by a 25% price surge since mid-October amid shrinking global stockpiles. But prices and earnings are still a long way from the super-cycle heyday of 2011 and companies’ shareholders also are looking for a payday by urging management to continue keeping costs in check to maximise profit. Then there are the copper bulls who know a prolonged strike would help their cause as the market tightens.

“The possibility of a strike is there,” Allendes said in a telephone interview. “They have completely rejected our proposal and our response depends on our conversations in the coming days. Higher copper prices should help us during the negotiations.”

Escondida, which churned out 1.2-million metric tons of the red metal in 2015, will serve as a precedent for the other 15 contracts coming up for renewal in Chile, the biggest copper-mining country, BTG Pactual said in a note to clients this week. Negotiations include Codelco’s El Teniente; Barrick Gold and Antofagasta’s Zaldivar; and Teck Resources’s Quebrada Blanca.

“A potential strike at Escondida would have an effect on the mining sector in Chile and in the rest of the world because it’s the first negotiation by a global company this year," said Cesar Perez, a basic-materials analyst at BTG Pactual. "If negotiations don’t progress, we contemplate the possibility of a strike that would deepen supply shortage in the market and increase prices."

AUSTERITY PUSH
Workers in six unions at Codelco’s Chuquicamata signed a 27-month work contract in December that included no real wage increase and a signing bonus of 4.35-million Chilean pesos. The bonus was about 40% below the previous contract.

Codelco has managed to avoid any real wage increases in its last eight negotiations by getting workers to buy in to its austerity push after the state-owned company’s debt and spending burdens mounted along with deteriorating ore grades, CEO Nelson Pizarro said Tuesday in an interview from Santiago.

“We didn’t budge,” Pizarro said, referring to Chuquicamata. In the end, “our people understood".

In the Chuquicamata talks, “all parties were responsible about restrictions in the industry",” Finance Minister Rodrigo Valdes told a conference in Santiago on Tuesday. "I hope this spirit is present in the important negotiations taking place these days in the public and private sectors."

STRIKE RISK
The agreement at Chuquicamata bodes well for Escondida, Dane Davis, an analyst at Barclays in New York, said by telephone. Still, there’s a reasonable chance of a supply interruption, he said.

“You’re looking at a 60% probability, give or take, that things are fine,” Davis said. “But you’re still looking at 40% that a strike could happen. I don’t know if it’s a black swan, but it’s certainly major.”

The potential for mine strikes globally is increasing as copper prices recover amid slowing supply growth, Citigroup and Barclays said in research notes. Strike activity “tends to be more prevalent in periods of rising copper prices,” Citigroup said this week.

About 3.5-million metric tons of mine capacity, or 17% of global planned production, have labour contracts up for renewal this year. That’s the highest volume to be affected by contract talks in four to five years and the bulk of it is in Chile, Citigroup said.

“There is a potential for it to move the market if there were a strike,” Davis said.