Battle for copper concentrates hits smelters

Too many smelters are chasing too little copper concentrate, driving mid-year contracts between smelters and miners, known as treatment and refining charges (TC/RCs), sharply lower and threatening the future of some plants.
"It's a return to a tighter copper market and it indicates smelters are competing hard to gain access to concentrates," analyst John Meyer at Numis Securities said. Many analysts forecast a growing concentrate deficit in 2007 of around 500,000 tonnes of contained copper from some 350,000 tonnes in 2006.
The TC/RC deals are the lowest since mid-year settlements in 2003 and could go even lower with some forecasting smelter closures and China particularly hard hit.
Last week a deal between Canadian copper producer Teck Cominco's Highland Valley and Japanese smelter Sumitomo Metal Mining Co was done at $45 a tonne and 4.6 cents per pound with a mechanism known as price participation (pp), which gives the smelter exposure to a higher copper price.
"If you take the headline number plus price participation you will arrive at a level of $60/6," a copper producer said. Such levels were already hurting the revenues of many smelters, he added. This compares with TC/RCs of $60/6.0 cents for calendar 2007, without a price participation clause and $95/9.5 with price participation in 2006.
"We expect the annual contract terms for 2008 to be settled around $45/4.5 - another drop from the mid-year terms - and, crucially, still with no price participation on most contracts," analyst Adam Rowley at Macquarie Research said.
Many smelters turn uneconomical below fees of $40 a tonne and would rather cut production, analysts said. Potential victims are plants in Thailand, India, China and some in Europe.
Smelters in China could face closure because they tend to have shorter term contracts and use more spot market feed. Hundreds of smaller Chinese smelters have raised output over the past few years upping competition for dwindling mine supplies.
"There are some like Jiangxi Copper that have significant amounts of their own feed, that gives them some insulation," Rowley said. But Jiangxi and some other large firms were exceptions. "The other reason why Chinese smelters are hard hit is the LME-Shanghai arbitrage which goes against them," Rowley added.
The Chinese smelters buy concentrates based on the London Metal Exchange (LME) price and they sell at a price, which is based on the Shanghai Exchange, which is currently lower.
Some smelters in Europe are also under pressure. Copper producers might be better off shutting smelters and selling their concentrates on third party markets, he said. "You process it at your own smelter and make a loss, or you sell it to someone else," Rowley said. But if smelters cut capacity, mining companies could suffer in years to come once more ore becomes available.
"There is that risk... but the mining companies are showing themselves... to be astonishingly ruthless these days with their increased oligopolistic powers in many markets," Societe Generale Corporate and Investment Banking's Stephen Briggs said. Traders said smelter closures were possible but not imminent as many were still getting some feed under last year's terms.