Take physic, pomp

Anyone for a base metals supply squeeze?

More on Doe Run. There are a lot of unconfirmed and unconfirmable rumours going around about Doe Run, so let’s just start at the beginning with two basic facts.
  • Doe Run Peru (DRP) is currently shut for all operations except its copper smelter supplied by its own ‘Cobriza’ mine
  • DRP is the hub for dozens of small and medium sized Peruvian mining companies. With DRP shut down, a potential supply bottleneck is already forming, especially for lead. DRP processes around 120,000MT of Pb per annum which is around 3% of world supply, as well as zinc, silver, etc.
Now the rumoury stuff that needs serious DD on your own part. UNCONFIRMABLE word is that DRP’s owner, Ira Rennert, cannot get the extended credit lines needed to keep DRP running because he’s up to his eyes in toxic paper and the banks that normally service both him and his debt lines are turning their backs. The parent company of DRP is junk bond traders Renco, which also controls the separate Doe Run company of the USA. If Doe Run USA gets closed down by the credit crunch, around 11.5% of world Pb (as well as the other base metals smelted by Doe Run) is taken off the market. Not only is that a large chunk of world Pb, it’s a very large chunk of Pb not smelted inside China’s borders. Then there’s US Magnesium, the world’s third largest Mg producer. That’s a Renco company.

This could become an almighty cluster—-. Peru’s unions have already said that DRP should not be bailed out by Peru’s government, but that would only mean standstill in many of the mines that supply DRP, not to mention the export activity, revenues etc that come from the smelter output. If Peru does bail out DRP, how much money would have to be flushed down a toxic black hole to keep the mining sector operational? Away from the possible knock-on effects, the US mining industry could be under the same kosh if the parent company is the source of the financial problems and it is not some isolated Peruvian problem at DRP. Then there’s the spot market…is this the reason we’ve seen a 20% rise in Pb spot these last few days (likely, as LME ringtraders are much sharper than I)? Or just maybe this still a black swan and it hasn’t been factored in yet.

The above is just speculation so far, folks, so DYODD. To emphasize the point, those two links provided are to Wikipedia pages, and nobody in their right minds makes a definitive decision based on a wiki. But it’s certainly a story worth following.

UPDATE: Reuters has more information on an updated report. Check it out.

UPDATE 2: Bloomie is running its own report now, with useful quotes from Peru union people.

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