China smelters to gain from Sterlite plant woes, boost Q2 copper output

Wed Apr 10, 2013 6:57am EDT

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* Some shipments already resold to China at TC/RC about $65/6.5 cents

* China smelters to buy more spot concentrates to boost output-Antaike

* Sterlite losing around 3,000-3,500 tonnes concentrate use per day-trader

* Spot TC/RCs hinge on duration of Sterlite closure

By Polly Yam and Melanie Burton

HONG KONG/SINGAPORE, April 10 (Reuters) - Chinese copper smelters are set to cash in on the closure of India's top smelter by raising production in the current quarter to benefit from higher treatment and refining charges for raw material concentrates.

India ordered Sterlite Industries to shut the smelter in Tuticorin in southern Tamil Nadu state over allegations of a gas leak. A fast-track environmental court has deferred until April 12 a hearing on allowing the plant to reopen.

Global miners and traders impacted by a 'force majeure' declared by Sterlite on deliveries of copper concentrates are seeking to resell their cancelled shipments, traders said. An international trading house has already resold its shipments due in April and May to Chinese smelters, they said.

Those shipments of clean, standard-grade concentrate were sold with treatment and refining charges of about $65 per tonne and 6.5 cents per pound right after the seller received the force majeure from Sterlite, traders said.

The charges were higher than about $60 and 6 cents for spot concentrates to China in March and charges for recent international tenders that were below $60 and 6 cents, traders said.

"Spot TC/RCs are being discussed at about $70-$75/7-7.5 cents now," said a trader at an international trading firm, who declined to be named because he was not authorised to talk to the media.

"We believe China will buy more spot concentrates."

Concentrate sellers pay TC/RC to smelters to convert concentrate into refined metal, with the charges deducted from the sale price, based on London Metal Exchange copper prices . The charges usually rise when supply increases.

A trade source in India estimated Sterlite may have reduced concentrate consumption by around 30,000-40,000 tonnes since the closure, meaning this material may be available to boost supply in global markets.

"They would have lost in a week at least 3-4 parcels of consumption. That is the consumption they are losing, around 3,000-3,500 per metric tonnes per day, that's a ball park figure," he said.

Usually force majeure, a contract clause that allows a company to miss shipments in circumstances beyond its control, does not apply to vessels already on water. But Sterlite has applied its force majeure to all parties, traders said, potentially boosting concentrate supply further.

Chinese copper smelters were already poised to raise metal production in the second quarter after they slowed output during the Lunar New Year holiday in the first quarter. The higher charges would prompt the smelters to operate even higher production rates, Yang Changhua, senior analyst at state-backed research firm Antaike said.

"The production in the second quarter could rise by about 100,000 tonnes from the first quarter," Yang said, who estimated China's refined copper production reached 1.46 million tonnes in the first quarter.

"Fundamentally, the need for imports of refined copper would fall as domestic production rises."

REFINING CHARGES CLIMB

This is not the first time Sterlite's environmental standards are coming under scrutiny. A 2005 Indian government study said the smelter leaked arsenic and heavy metals into the soil and water.

The company says it has since complied with recommendations by pollution authorities to improve environmental standards.

Traders are expecting spot charges to rise but others warned that the Sterlite closure may prove short-lived, muting overall market impact, as the smelter pushes to reopen.

"The feeling is that this should not last long, that it's more of a political game rather than anything else," said the trade source in India. "But if it doesn't get resolved on Friday, it could get nasty," he added.

Near term charges are rising but the charges may be capped below the $80/8 cents mark, traders said.

"I hear that spot TC/RCs have risen to $75/7.5 cents on the Sterlite news," a smelter source in Asia said.

These charges are higher than a $69 and 6.9 cents contract a Chinese smelter signed with a global miner for shipments between March and September, and above the benchmark $70 and 7 cents Chinese smelters won from global miner Freeport McMoRan Copper and Gold for 2013 concentrate imports. (Editing by Muralikumar Anantharaman)

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