Freeport deal with China copper smelters on charges may pressure BHP

HONG KONG Mon Nov 18, 2013 5:06am EST

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HONG KONG (Reuters) - U.S. miner Freeport-McMoRan Copper & Gold Inc (FCX.N) has agreed to pay nearly a third more in annual processing charges to China's leading copper smelters, likely increasing the pressure on rival BHP (BHP.AX) to raise its own offer on the charges.

The higher charges reflect expectations for growing mine supply pushing the market into a widening surplus next year and keeping a lid on copper prices.

China's no. 1 producer, Jiangxi Copper Company Ltd (0358.HK), has agreed with Freeport to treatment and refining charges (TC/RC) of $92 per tonne (1 tonne= 1.102 metric tons) and 9.2 cents per pound for term copper concentrate shipments in 2014, sources said on Monday, setting the benchmark for the region.

That is 31 percent higher than the processing charges of $70 and 7 cents charged by the smelters from Freeport this year. Other smelters in China have followed suit and struck similar deals with Freeport.

Miners pay TC/RCs to smelters to convert concentrate into refined metal, with charges deducted from the sale price. The charges typically rise when supply increases.

"$92 and 9.2 cents should be China's benchmark for 2014," said a source at Jiangxi Copper (600362.SS) with direct knowledge of the agreement.

The two companies had taken two days to reach a deal on the charges, the source added.

But the processing charges are lower than the more than $100 and 10 cents originally sought by Chinese smelters and $113-$115 and 11.3-11.5 cents in the spot market in Asia this month.

Freeport, which runs the world's second-biggest copper mine in Indonesia, did not immediately respond to an email from Reuters seeking comment on the agreed charges sent outside office hours.

GROWING METAL SURPLUS

BHP (BLT.L) typically produces high grades and has offered lower charges than Freeport to Chinese smelters in 2013 and 2014.

Still, the Anglo-Australian miner's opening gambit of $80 and 8 cents offer to Chinese smelters last week now looks very low, and it could be under pressure to hike the rate, industry sources said.

BHP is meeting the smelters for second-round talks this week, they said.

"There should be just one China benchmark. It is $92 and 9.2 cents for 2014. We don't know what BHP would do next, but we certainly would not agree $80 and 8 cents," said a trading manager at one large smelter that signed up with Freeport.

Chinese smelters have threatened to take a 'holiday' with BHP if they could not reach an agreement with the miner. A 'holiday' means Chinese smelters would not take BHP concentrates in 2014 under multi-year contracts using yearly TC/RCs.

Some Chinese smelters took a holiday for BHP term contracts this year after the miner offered $68 and 6.8 cents for 2013 shipments. The smelters still received some concentrates from BHP, using spot TC/RCs, sources at smelters said.

Projections for a growing copper surplus next year as mine supply picks up have dampened spot prices for the metal - they hit three-month lows last week.

Analysts expect the global copper market to post a surplus of 182,000 tonnes this year, up from a previous forecast of 153,000 tonnes, and then balloon to a 328,000-tonnes surplus in 2014, according to a Reuters poll last month.

"It's probably a more realistic view of the market, given the market has moved into surplus - and the magnitude of that surplus," analyst Robin Bhar of Societe General in London said of Freeport's deal with the Chinese smelters.

(Additional reporting by Melanie Burton in SINGAPORE; Editing by Muralikumar Anantharaman)

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