Chile Power Crunch May Cut Copper Output, Spur Record

April 9 (Bloomberg) -- An energy shortage in Chile may do for copper what cuts in electricity supplies did for platinum in South Africa -- spark a record-setting rally in prices.

Reduced natural-gas imports from Argentina and a drought that cut hydropower output may force Chile, the world's biggest copper producer, to ration electricity to mines owned by Codelco, Anglo American Plc and Antofagasta Plc. In South Africa, platinum production plunged and prices jumped as much as 51 percent this year after utilities limited power in January.

``Power is a problem now in Chile,'' Hugh Callaghan, chairman of copper miner Tamaya Resources Ltd., said in a phone interview from London on March 25. ``The ingredients are there for another spike in copper.''

Power cuts or blackouts in Chile may push copper above its March 6 record of $8,820 a metric ton in London, said Allan Trench, head of copper research at consulting company CRU in London. If Chinese demand keeps rising and supplies are disrupted, copper may jump 17 percent to $10,000, he said in a phone interview March 28, before he was scheduled to join mining executives at a CRU-sponsored copper conference in Santiago that began last night.

Energy in Chile is ``a real issue,'' Bret Clayton, chief executive officer of Rio Tinto Group's copper division, said in an interview at the conference today. With ``Chile being the primary producer, it's going to have an impact on the market.''

Copper has quintupled in the past five years as rising global demand for wire and pipe, led by China, eclipsed output, forcing manufacturers to draw down inventories.

Rationing Power

Chile may be forced to limit power use for the first time since 1999 because a drought has reduced water levels at hydroelectric reservoirs, said Sergio Zapata, an energy analyst at Santiago stock broker BanChile Corredores de Bolsa.

The drought pared electricity output at utilities already strained after neighboring Argentina decreased gas shipments starting in 2004. In northern Chile, generators designed to run on natural gas are using diesel instead, increasing the risk of machinery failures and blackouts, Zapata said.

``There can be a problem at any moment because of equipment breakdowns,'' Zapata said.

Copper futures on the Comex division of the New York Mercantile Exchange may top the record of $4.04 a pound if supplies are disrupted, said Rodrigo Aravena, an economist at BanChile. The brokerage forecasts an average for 2008 of $3.50, compared with $3.23 last year.

`Buying Orgy'

Copper gained 32 percent this year to $4, making it the third-best performer behind natural gas and corn among 19 commodities in the Reuters/Jefferies CRB Index. Credit Suisse Group said April 4 copper may reach $12,000 a ton ($5.44 a pound) this year in London.

Not everyone expects higher prices.

This year's first-quarter gain was fueled more by hedge- fund buyers than physical demand or supply shortages, Austin Brown, an analyst at Touradji Capital Management LP, said April 2. Paul Touradji, founder of the fund, said last month a raw- materials ``buying orgy'' had increased the risk of a collapse.

Copper will decline to $3 a pound in the first quarter of 2009 from $3.33 this quarter, according to the median estimate of nine analysts surveyed by Bloomberg.

South Africa Disruptions

In South Africa, the world's top platinum producer, most mines were forced to shut for five days in January, partly because domestic utilities have been unable to expand to keep pace with rising demand.

Disruptions in supplies of coal to generate electricity and maintenance on turbines led to energy shortages, said Mark Davidson, an analyst at Standard & Poor's in London. Power to mines has been reduced by 10 percent this year, and South Africa may have rolling blackouts through 2012, he said.

Platinum futures for July delivery gained $15, or 0.7 percent, to $2,044.60 an ounce in New York, after reaching a record $2,308.80 on March 4.

An energy shortage in Chile won't boost copper as much as the South Africa blackouts did for platinum, Trench said. South Africa produces 85 percent of the world's platinum, while Chile mines 35 percent of global copper, he said.

Vulnerable Mines

Mines in central Chile owned by Chile's state-run copper producer Codelco, Anglo American, Antofagasta and Freeport- McMoRan Copper & Gold Inc. are vulnerable to electricity cuts because of the drought. The mines account for about a quarter of the country's copper production.

Codelco will install back-up generators in central Chile within a month to supply about 10 percent of its energy, which probably is enough to prevent production cuts in the case of rationing, Chief Executive Officer Jose Pablo Arellano said April 7 at a news conference in Santiago. Most mining companies will have back-up generators installed by June, said Jorge Bande, a board member of Codelco, in a telephone interview.

Codelco and BHP Billiton Ltd. agreed April 2 to help utility GasAtacama SA avoid bankruptcy in a bid to avert power cuts.

Oscar Gonzalez Rocha, chief executive officer of Southern Copper Corp., the fifth-largest producer, and Joanne Freeze, chief executive of Candente Resource Corp., also said prices will rise.

A scarcity of energy, equipment and labor, and few large mines opening worldwide, will keep the price above $3 for years, Gonzalez Rocha said in a telephone interview.