Copper concentrates tightness threatens benchmark pricing

The copper market may be stuck in a well-worn trading range but there is plenty of action unfolding in the mine concentrates segment of the copper supply chain

Trucks are seen at a copper mine of Jiangxi Copper in Dexing, Jiangxi province, China December 16, 2015. REUTERS/Stringer

Reuters | Andy Home

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The copper market may be stuck in a well-worn trading range but there is plenty of action unfolding in the mine concentrates segment of the copper supply chain. China’s copper smelters have just slashed their minimum charges for converting concentrates into refined metal.

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The 10-member China Smelters Purchase Team (CSPT) has set treatment and refining charges at $55.00 per tonne and 5.5 cents per lb respectively for third-quarter deliveries.

That’s down from $73 and 7.3 cents in the second quarter and from $92 and 9.2 cents in the first quarter.

It is now sufficiently low to cause margin distress for higher-cost smelters.

Tumbling treatment charges reflect a tightening market for copper raw material.

They are also putting further stress on an already creaking benchmark system of pricing copper concentrates.

Mine supply stalls

This was always going to be a year of low or no copper mine production growth.

The International Copper Study Group (ICSG) forecast minimal growth of 0.2% this year at its spring meeting in May.

Even that low-ball figure is looking optimistic with global production of concentrate falling 1% in the first quarter of this year, according to the group’s latest monthly statistical update.

The two main drags on supply so far this year have been Chile and Indonesia.

Chilean output slid 5% in the first quarter “mainly due to lower copper head grades”, according to the ICSG.

Chinese appetite growing

While mine supply growth is on pause, China’s collective appetite for concentrates is still growing at a healthy clip thanks to the continued expansion of the country’s smelting capacity.

China’s imports of copper concentrates rose by 14% to 19.7 million tonnes, gross weight, last year and there has been no drop-off so far this year with first-half imports up 10% year-on-year.

Quite evidently, this has not done much to stop the slide in treatment charges.

Indeed, with smelter production growth slowing in China, the tightness in the raw materials market looks anomalous.

Colin Hamilton, an analyst at BMO Capital Markets, suggests that there may be other factors at work.

“Lower scrap consumption at smelters may be playing a part, increasing concentrate consumption per tonne of refined copper,” he says. (“Copper Concentrate: China can’t get enough”, July 17, 2019)

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The steady decline in outright tonnages of scrap being imported by China is down to the steady tightening of import purity rules. Scrap imports fell by 32% last year and by another 27% in the first five months of 2019, albeit with some mitigation from higher average grades.

However, Hamilton suggests that another reason for a tight concentrates market in China may be a faster-than-expected decline in domestic mine production.

This is a notoriously opaque part of the copper supply picture but there is no reason to assume that local copper miners haven’t been facing the same environmental clampdown as other industrial metal producers.

What is not in doubt is that Chinese smelters are willing to accept ever lower treatment charges despite higher concentrate imports and relatively subdued refined production growth.

Breaking the benchmark?

The tensions in the copper raw materials market are such that they appear in danger of fracturing both the CSPT and the traditional annual benchmark system of pricing concentrates.

Two of the smelter team’s largest members, Jiangxi Copper and Tongling Nonferrous Metals Group, have broken ranks by signing early deals for first-half 2020 deliveries with Chilean miner Antofagasta.

This is a highly unusual development.

Normally the CSPT negotiates annual terms around the time of the Asia Copper Week conference in Shanghai in November.

These terms then become the “benchmark” for the year with other smelters falling into line around the CSPT negotiated price.

The rush by the two smelters to negotiate early deals is a sign of the pressures on processors to secure supplies but may also be “a play to run others into the ground, break up the CSPT and consolidate the sector cheaply,” BMO’s Hamilton says.

Antofagasta for its part may be keen to secure a bespoke deal to reflect the relatively high purity of its concentrates.

The terms for treatment and refining charges for the first-half 2020 deal are believed to be around $64 per tonne and 6.4 cents per lb, which would mark a significant drop from this year’s benchmark terms of $80.80 and 8.08.

It remains to be seen how this will impact negotiations for the 2020 benchmark or even whether the benchmark will survive.

BHP, which used to take the lead role in the annual negotiations with smelters, walked away from the benchmark system about five years ago, preferring to sell its concentrates on shorter-dated or even spot deals.

Since then Antofagasta and Freeport McMoRan have taken it in turns to lead the miners in the annual talks.

But with Antofagasta locking in its own supply deal with the two CSPT breakaway members and Freeport McMoRan with less to sell from its Grasberg mine, it is highly uncertain how the annual benchmark negotiations will play out over the coming year.

Consolidation ahead?

So far this turbulence in the copper concentrates segment of the market hasn’t affected the availability of refined metal.

While China has been importing more concentrates, it has been importing less refined metal with net imports sliding 12% over the January-May period to 1.23 million tonnes.

That may be about to change, though, with suggestions that several Chinese smelters will take downtime for maintenance as a way of reducing exposure to margin-negative treatment charges.

Given the expansion of smelting capacity in China, however, that may amount to no more than kicking the can down the road.

The country’s copper smelter sector may need more fundamental consolidation. It’s starting to look as if some members of the CSPT agree.