UPDATE 1-High acid prices add pressure to miners' margins

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By Anna Stablum

LONDON, Oct 10 (Reuters) - Record prices for sulphuric acid, used in the production of copper and a significant cost in extraction, are squeezing mining company margins at a time when copper prices are weakening, analysts say.

Chile, the world's largest copper producer, is likely in the next few days to set this year's global benchmark prices for sulphuric acid and analysts say they may double.

"Rising acid prices and falling copper prices will keep eating into margins," said analyst Jon Bergtheil at Citi.

This year's talks have dragged on as copper producers -- such as BHP Billiton (BLT.L) (BHP.AX) -- have been unsettled by the financial crisis and falling metal prices.

"Given the strength of this year's demand and the high level of pricing achieved in the spot market, I wouldn't have been surprised to see the benchmark for this year set at $300-350 per tonne, or even above," said sulphuric acid analyst Joanne Peacock at CRU, a London-based consultancy.

"However, the market has turned extremely rapidly in the past few weeks, and the market is now expecting a far lower number, although this is probably still likely to be higher than last year's price."

In the 2008 negotiations last year sulphuric acid prices rose to around $170-190 from 2007's $65, Peacock said.

A copper producer, using the solvent extraction and electrowinning (SX-EW) process which accounts for around 17 percent of world copper production, needs 3-3.5 tonnes of acid to turn ore into one tonne of copper metal.

Sulphuric acid costs, as a proportion of total costs, vary across mining companies depending on the nature of the ore bodies and whether they are involved in smelting and refining.

But costs can be substantial for miners.

Antofagasta (ANTO.L) said first-half 2008 production costs at its Michilla copper mine in Chile had risen 62.8 cents/lb to 195.1 cents from the same period last year, and of that rise, some 32 percent or 19.9 cents were due to sulphuric acid.

EYES ON CHILE

Sulphuric acid is mainly produced by burning elemental sulphur, but it can also be a byproduct of the smelting process. Its main use is in fertiliser manufacturing.

In Chile, state-owned copper producer Codelco supplies most of the country's copper mines with sulphuric acid from its own smelters but the world's biggest copper nation also imports.

"Chile gets most of its acid from Codelco but also from Asia and Europe," a European copper producer said.

CRU's Peacock said imported acid was initially offered at as much as $400-450 for 2009 contracts, but a falling copper price -- down now by around 45 percent since the record $8,940 a tonne in July -- could scupper those negotiations.

"A lower copper price will of course influence the negotiations as it sets the tone for what people can pay," she said.

Copper producers worldwide are keeping a close eye on the Chile talks, but many consumers are expecting a lower sulphuric acid price as the sulphur market itself has collapsed.

"We're following what is happening in Chile, they are negotiating as we speak, but our consumers are certainly expecting the prices to drop," another copper producer said.

A collapse in the sulphur market, due to falling demand from China, is expected to put pressure on acid prices going forward.

"Demand in China fell away from the fertiliser industry -- and it caused a lot of panic in the market," Peacock said.

The sulphur market has been very tight for the past 12 months and the sulphur price in some regions rose to $900 a tonne from $100. But prices have been falling since early September and are now at below $200, she said.

"Fertiliser prices have come down and that will reflect on sulphuric acid prices," the second copper producer said.

Peacock said if the sulphur price remains weak, copper smelters will be forced to reduce their acid prices.

CRU expects the global sulphuric acid market to remain tight in 2009 with strikes in Latin America during 2008 pausing smelter operations and limiting acid supplies.

"There is some more production coming on in 2010 which will rebalance the situation," Peacock said.

She said it was hard to tell how long sulphuric acid prices would stay high, but the peak appeared to be over. (Reporting by Anna Stablum; editing by Christopher Johnson)