(Repeats with no changes. The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, Nov 21 (Reuters) - Copper’s recent turbo-charged rally has upended the market’s narrative of supply surplus.
Too much supply was supposedly the reason why copper, until this month, was the worst performer among the base metals traded on the London Metal Exchange (LME).
But right now the market is struggling to work out where all that extra copper actually is.
LME stocks are low and falling. Stocks registered with the Shanghai Futures Exchange (ShFE) are rising but still low.
The shuffle of metal between the two exchanges has blown a smoke-screen around the stocks signals this year but the much-feared wall-of-copper is proving surprisingly elusive.
The best bet is that it is still working its way down the supply chain with this year’s surge in mine production yet to be converted into refined metal.
Because at the heart of copper’s supply story has always been the wave of extra material coming from a combination of new mines and expansions, all entering the price cycle at precisely the wrong moment.
Yet even this assumption has been thrown into doubt by a surprise drop in smelter treatment terms for 2017 shipments, implying the copper raw materials picture may be tightening earlier than expected.
Graphic on annual copper treatment terms:
Freeport McMoRan and Jiangxi Copper have inked a concentrates supply deal with treatment and refining terms (TCRCs) of $92.50 per tonne and 9.25 cents per lb.
That’s how much Jiangxi will charge Freeport for converting its mine production into refined metal next year. The treatment charge is lower than both this year’s $97.35 and last year’s $107.00 with the refining component registering the same percentage drop.
It’s a big surprise.
Most analysts were looking for the fees to rise year-on-year with smelters capitalising on an over-supplied concentrates sector to maximise their revenue streams.
Many smelters were looking for the same. Aurubis, which operates smelter-refineries in Germany, Belgium and Bulgaria, has already described the Freeport-Jiangxi terms as “too low”.
There may be more to the deal than meets the eye. Concentrate conversion contracts can be complex with secondary clauses, covering such esoterica as quotational period, acting as modifiers to the headline treatment and refining charges.
But, that said, Freeport’s terms have served as the market’s annual benchmark in the last couple of years and there’s no reason to think they won’t again in 2017.
And the terms, at least at a headline level, suggest a tightening in the copper concentrates part of the supply chain.
This was only really supposed to happen from 2018 onwards, when copper miners’ collective capital expenditure crunch translated into a lack of new projects entering the market.
So why’s it happening early?
One element of copper’s supply picture that has changed significantly in the last month or so is the level of disruption.
There was hardly any production disruption in the first half of 2016, a rarity in a metal that has a long history of unexpected mine supply hits.
Indeed, analysts build a “disruption allowance”, typically around five percent, into their supply-side calculations to account for copper’s propensity to under-perform relative to mine plan.
But disruption was conspicuous by its absence in the first part of the year, compounding the sense of a building wall of copper coming to market.
The third-quarter reporting season, however, brought several downgrades to expected production from major producers such as Freeport, Rio Tinto and Anglo American.
Since when there has been a major outage at BHP Billiton’s Olympic Dam operations in Australia, a strike at Freeport’s Grasberg mine in Indonesia and a blockade of MMG’s Las Bambas mine in Peru.
Copper, it seems, has reverted to previous unpredictable form and it has done so just as smelters and miners do battle over their 2017 contracts.
There is a sense, also, that the wave of new mine supply has already peaked.
The International Copper Study Group (ICSG) estimates that global mined production will increase by four percent this year.
That figure, though, understates the growth experienced in the copper concentrates part of the chain because it includes straight-to-metal mine production which has fallen this year thanks to Glencore’s cuts to its African operations.
Strip out mines using leaching technology to produce refined copper cathode and the surge has been a more impressive six percent.
But next year the ICSG is forecasting zero growth in mine supply. The headline figure comprises a sharper six-percent year-on-year decline in cathode leaching, implying some growth in concentrates supply, but nowhere near this year’s pace.
In part this flattish outlook picture is down to the fact that new mines such as Las Bambas have come online far more smoothly than might have been expected of such large, complex operations.
Las Bambas only began production in the fourth quarter of 2015 but this year’s third-quarter output of 106,000 tonnes was already close to nameplate capacity.
Such efficient ramp-up has acted to bring forward the burst in supply growth that was expected to extend until 2018.
The burst, it seems, has already largely taken place ahead of schedule.
There are far fewer big supply boosts scheduled for next year, other than an expansion of capacity at the Escondida mine in Chile.
And beyond Escondida the project pipeline starts to dry up, reflecting the lock-down on new project approvals occasioned by copper’s weak price environment over the last couple of years.
True, Glencore can be expected to bring back to production its Democratic Republic of Congo operations but these are straight-to-metal leaching mines with no impact on availability of copper concentrates.
Smelters such as Jiangxi should, however, be well stocked with concentrates.
China, which is the world’s largest converter of copper as well as its largest user, has been soaking up ever increasing amounts of concentrate for many months now.
The country’s imports of copper concentrates are running at record levels, up 31 percent to 12.2 million tonnes (bulk weight) in the first nine months of this year.
It may still be the case, as the bears argue, that this will translate into higher refined production by Chinese smelters over the next year.
Or it may not.
Because this benchmark deal between Freeport and Jiangxi suggests smelters are factoring in an earlier-than-expected turn of the mine supply cycle.
If so, they may want to hold on to their raw material stocks rather than transmitting them into the refined metal part of the supply chain.
The copper supply feast may still be playing out but the days of famine already seem to be nearing.
Editing by Adrian Croft