(Repeats with no changes. The opinions expressed here are those of the author, a columnist for Reuters)
By Andy Home
LONDON, Sept 2 (Reuters) - This was supposed to be a year of supply surplus for the copper market.
Yet here we are in September and visible inventory, particularly that on the London Metal Exchange (LME), is still extremely low, while tightness flares across the nearby LME spreads.
The International Copper Study Group’s (ICSG) most recent monthly update assessed the global refined copper market as being in a 450,000-tonne deficit in the first five months of the year, or a 308,000-tonne deficit once movements in Shanghai bonded stocks are factored into the equation.
So where exactly has that much-discussed wall of supply gone? The answer comes in several parts but it starts, as ever, with what’s coming out of the ground.
And while mined copper production has been rising, up five percent in January-May according to the ICSG, it has been rising less than expected.
That in part is down to the normal start-up headaches of bringing new mines on stream but in greater part it is down to Indonesia’s ban on exports of copper concentrates from the Grasberg and Batu Hijau mines.
That ban is now dissolving. Freeport McMoRan, which operates Grasberg, has resumed shipments, while Newmont Mining , which operates Batu Hijau, is close to doing so.
With classic commodity market timing, export flows from Indonesia will resume just as previously-delayed new mines finally start ramping up production.
Treatment and refining charges, paid by miners to smelters to have their concentrates converted into metal, have leapt to multi-year highs over the last few weeks.
That says smelters at least think the wall of supply is imminent. But how long will it take to feed through into the refined copper market?
It’s worth recalling that no-one expected Indonesia’s ban on the export of unprocessed minerals, introduced at the start of the year, to impact copper. The accepted wisdom, always a dangerous thing, was that the ban was a nickel and aluminium story, given Indonesia’s role in supplying nickel ore and bauxite to China.
It was the Indonesian government’s decision to put in place an escalating export tax on copper concentrates that led to the months-long stand-off with Freeport and Newmont.
Freeport cut operating rates at its giant Grasberg mine to around half, aligning production with what the country’s only smelter could take. Newmont idled Batu Hijau in June after its concentrate storage facilities were maxed out.
At the time of its Q2 results Freeport estimated the export ban had caused the loss, or “deferral” as the company calls it, of around 125,000 tonnes of copper in concentrates in the first half of 2014.
Batu Hijau produced 36,000 tonnes of copper in the first half of this year, compared with original full-year guidance of 110,000-125,000 tonnes. There has been no production at all since early June.
Indonesia, in short, has cost somewhere around 200,000 tonnes in lost, or “deferred”, production so far this year.
It’s not been the only supply hit.
Delays and start-up problems at new mines such as Toromocho in Peru have played their part. State Chinese company Chinalco has revised several times its guidance numbers for Toromocho due to commissioning issues. Its latest forecast is production of 100,000 tonnes contained copper this year, compared with an original figure of 190,000 tonnes.
But such slippages are by no means unusual when it comes to bringing on line a mine the size of Toromocho, which will produce 300,000 tonnes per year of copper once running at full capacity.
Indonesia, by contrast, was both unexpected and significant in terms of its impact on raw materials availability this year.
The Indonesian effect will now wane.
Freeport has already resumed shipments of copper concentrates after reaching a deal with the Indonesian government. Newmont should follow shortly, judging by comments on Monday from the country’s ministry of mines.
The resumption of Indonesian supply will take place just as three new mines start adding to global concentrates supply.
The Caserones mine in Chile, owned by Japan’s Pan Pacific Copper and Mitsui & Co Ltd, was due to have started operations in January but only made it into commercial production at the end of May. It is targeting production of around 75,000 tonnes this year, half its nominal capacity.
Closer to original time-table but over-budget has been the Sierra Gorda mine, also in Chile. Polish owner KGHM announced first production at the end of July with ramp-up to full first-stage capacity of 120,000 tonnes per year expected to be achieved early next year.
Brazil’s Vale, meanwhile, completed the second-phase development of its Salobo mine, adding 100,000 tonnes of annual capacity, during the second quarter.
Toromocho is also ramping up, albeit more slowly than expected, while Oyu Tolgoi in Mongolia and Bisha in Eritrea have already made it past the teething-problem stage of commissioning.
Indeed, the impact of both is clear to see in China’s import figures. Imports of copper concentrates from Mongolia have averaged above 100,000 tonnes per month (bulk weight) for the last three reported months (May to July). That’s more than double the monthly average over the course of 2013.
Imports from Eritrea have totalled 117,000 tonnes (also bulk weight) so far this year, reflecting the ramp-up in output from Bisha, owned by Nevsun Resources, which came on line in Q3 2013.
In short, there’s a lot of copper about to hit the concentrates market at the same time.
Which is why treatment and refining charges, the best gauge of raw materials availability in the copper market, have rocketed to around $120 per tonne and 12 cents per lb over the last month or so.
These are very high numbers. The last time that annual deals were done anywhere near this level was back in 2005.
And that in itself may help to remove one of the bottlenecks that has prevented rising concentrates availability feed through into greater refined metal availability.
China, the world’s largest concentration of smelting capacity, has actually seen refined copper production growth slow this year, largely due to a flurry of maintenance shutdowns in the first half.
Less maintenance in the second half combined with greenfield smelter projects and a historically high incentive conversion price should help transmit the building raw materials surge into the refined market-place.
The efficiency of that transmission process will still be affected by one other bottleneck and one that may prove to be more sticky.
This new generation of mines will not produce concentrates of the same quality as older generations. By-product impurities will require “dirty” concentrates to be blended with “clean” concentrates.
The prime example of this is Chilean state producer Codelco’s Ministro Hales mine, which entered production last year. Its concentrate has arsenic levels too high for Chinese smelters to take without blending, which is why Codelco has done a deal with trading house Ocean Partners to blend material at the latter’s Taiwan facility before sale to China.
The requirement to blend slows the mine-to-metal process and it looks set to become part of the copper market in the years ahead, not least in terms of fracturing the pricing model for concentrates between “clean” and “dirty” materials.
Exactly by how much it will slow the raw materials transmission chain is now the key question.
Because what’s not in doubt is that the wall of copper supply is finally arriving. Those historically high treatment charges tell us so. (Editing by David Evans)