(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON, July 3 When Indonesia banned the export
of unprocessed minerals in January of this year, the consensus
view was that the most significant impact would be on the nickel
and aluminium raw material markets in that order.
Copper barely warranted a mention.
Analysts at Macquarie Bank, for example, issued a research
note on January 14, two days after the ban came into effect,
examining the implications in a question-and-answer format. The
only reference to copper came in the 19th bullet point under the
telling heading: "Have copper producers been let entirely off
Six months on, though, and one of the country's two giant
copper mines is on care and maintenance and the other has cut
production by half. There have been no concentrate exports since
Not only is this the single biggest hit to copper mine
supply this year but it is acting to accelerate a fracturing of
the copper concentrates pricing model.
Both Freeport McMoRan, which owns and operates the
Grasberg mine, and Newmont Mining, major stakeholder in
and operator of the Batu Hijau mine, appear to have been
blind-sided by the January rule changes.
After all, not only are both major employers and tax-payers
in Indonesia, but both also thought themselves protected by what
they believed to be legally-binding contracts of work (COW)
covering their operations in the country.
In theory, such COWs set in stone the level of taxes and
royalties payable over the contracts' life-time.
And anyway, copper concentrates are not unprocessed
minerals. As Newmont has repeatedly pointed out, around 95
percent of the value chain is captured in this form of copper.
Why would anyone build a new smelter in Indonesia just to get
the last five percent?
Indonesian policy-makers, though, beg to differ. There will
be a steep and escalating tax on exports of copper concentrates
until 2017, when they will also be banned completely.
Those legally-binding COWs, it seems, will simply have to be
changed to accommodate the new regulations.
After weeks of negotiations, Newmont this week announced it
would seek international arbitration.
Freeport is still talking. But then it has an even bigger
problem. Its COW expires in 2021, unlike Newmont's, which runs
That places a major question-mark over the future of the
Grasberg mine, not least because Freeport has to spend heavily
on switching to underground mining when the open pit is
exhausted in 2017.
In the interim, neither has been exporting since the start
of the year, depriving the global market of a major source of
Freeport has reduced the milling rate at Grasberg by around
half to align mine output with the intake capacity of the
country's sole existing copper smelter, which Freeport partly
Newmont also has an off-take agreement with the Gresik
smelter but not big enough to support continued operations at
Batu Hijau. Rather, it will deliver 81,000 tonnes of
concentrates from stocks over the remainder of this year. The
mine itself was shuttered and placed on care and maintenance in
Batu Hijau was scheduled to produce 110,000-125,000 tonnes
of contained copper this year, meaning it will lose around
10,000 tonnes for each month of closure.
Grasberg was originally expected to produce 1.1 billion lb
(just under 500,000 tonnes) of contained copper in 2014,
guidance that was trimmed to 900 million pounds (just under
410,000 tonnes) at the time of Freeport's Q1 report.
Even that, though, assumed a resumption of exports in May,
the company warning that any delay beyond then would mean "a
deferral" of 50 million lb (22,700 tonnes) per month.
Right now, therefore, the absence of a deal on the
resumption of exports is costing around 34,000 tonnes per month
of lost, or "deferred" as Freeport would call it, copper
In times gone by this would have been a major bull driver in
the copper market. But those were the days of chronic mine
shortfall. Today, the supply picture looks very different as a
wave of expansions and new mines comes on line to the point that
just about every analyst out there thinks 2014 will be a year of
substantial market surplus.
Albeit a little less substantial, given the combined hit
from both Indonesian producers.
But the real significance of the loss of export flows from
Indonesia goes beyond just the affected tonnage.
Both Batu Hijau and Grasberg produce "clean" copper
concentrates containing a lot of gold and very little bad stuff
This is an increasingly important differentiator in the
copper raw materials markets because a lot of the new mines
coming on stream produce "dirty" concentrates.
The prime example is the Toromocho mine in Peru, owned and
operated by China's Chinalco, which warned in June
that not only was it downgrading its production guidance this
year due to commissioning issues but that the arsenic content of
some of the concentrates being produced exceeded five percent.
That's a critical threshold, since Chinese smelters can't
treat such material on environmental grounds. In fact, they
can't even legally import it.
This means it must be blended with cleaner concentrates,
such as those from Grasberg and Batu Hijau.
The copper concentrates pricing model was already starting
to fragment along these lines even before the Indonesian export
The treatment charge on Toromocho material, for example, is
quoted at close to $200 per tonne, compared with the $95.50
negotiated by BHP Billiton with Chinese smelters for
second-half 2014 deliveries. And that's not factoring in the
excess penalties smelters can charge for all the bad stuff in
That evolution of concentrates pricing into a two-tier
model, one for "clean" and another for "dirty" concentrates, is
only going to accelerate with the loss of a sizeable amount of
"clean" Indonesian material.
LOSSES TODAY, LOSSES TOMORROW
Some sort of deal between Freeport and the Indonesian
government, allowing for the resumption of exports from
Grasberg, does look on the cards. Newmont may find it tougher,
judging by some pretty pointed comments from Indonesia's new
chief economics minister about its decision to go for
But the longer-term impact is unchanged, since Indonesian
policy-makers show no signs of bending on the key provision that
from January 2017 what is mined must also be refined in the
The inference is that Asian copper smelters are going to
lose permanently two major sources of concentrates supply, and
"clean" supply at that, in a couple of years time.
By then, the current mine supply growth dynamic will have
waned. Indeed, analysts are already pencilling in a return to
copper deficit, a lagging effect of the current shareholder-led
austerity in the natural resources sector.
The copper market appears to have been just as blind-sided
by events in Indonesia as the two producers operating in the
But this is still a preview. The real impact will come in
January 2017, when the total ban on copper concentrate exports
(Editing by William Hardy)