(The opinions expressed here are those of the author, a columnist for Reuters.)
* Copper smelter treatment terms: tmsnrt.rs/2Re4dSY
* China's imports of copper raw materials: tmsnrt.rs/2qheS4n
By Andy Home
LONDON, Dec 3 (Reuters) - It’s been a frustrating year for copper bulls.
Trade war has trumped fundamentals as copper has been used as a proxy for trading the twists and turns of Sino-U.S. trade talks.
The fact that London copper, currently trading around $5,815 per tonne, is virtually unchanged on the start of the year says much about the on-again-off-again nature of these talks.
Even in terms of internal dynamics, though, concerns about demand have trumped worries about supply as macroeconomic uncertainty has exacerbated cyclical manufacturing weakness, not least in China.
That has served to mask just how poorly global mine supply has performed this year.
But the evidence is there in the form of the deals just negotiated for next year’s smelter treatment and refining charges (TC/RCs).
Too much smelting-refining capacity is chasing too little mine supply with TC/RCs falling to their lowest since 2011 and smelter margins coming under intense compression.
The benchmark smelter terms for 2020 have just been set at $62 per tonne for smelting and 6.2 cents per lb for refining.
That’s a sharp fall from last year’s $80.80 and 8.08 cents respectively. Indeed they are the lowest headline terms since 2011, when the price of refined copper was trading close to its all-time nominal highs above $10,000 per tonne.
These fees are charged by smelters for converting mined concentrate into refined metal. They are a good indicator of raw material availability, smelters charging more in times of feast and less in times of famine.
As such, next year’s treatment charges are a clear warning that the world’s copper mines aren’t producing enough concentrates to satisfy smelter demand.
Mined production fell by 0.5% in the first eight months of this year, according to the latest monthly bulletin from the International Copper Study Group (ICSG).
Mine capacity utilization was 81.5% in the period, down from 82.0% in the year-earlier period and down from 83.7% in 2017.
Some of this was expected, such as the drop in output at the Grasberg mine in Indonesia as it transitions from open-pit to underground operations.
Much of it wasn’t, though, with unforeseen disruptions running at an elevated rate in 2019.
Such is the troubled nature of copper’s mine supply chain that analysts have long got used to allowing for such disruption in their forecasts but they are in risk of running out of “allowance” this year.
Those at JP Morgan, for example, have already “removed almost 800,000 mt of supply from our balance, the highest amount since 2012.” (“Metals Quarterly”, Nov. 22, 2019)
The flip side of this raw materials balance equation is the growth in smelter demand for mined copper concentrates.
Chinese smelters are set to add 900,000 tonnes of annual smelter capacity in 2019 with another 350,000 tonnes due next year, according to China’s state research house Antaike.
China has been riding its luck so far this year.
The continued closure of India’s 300,000-tonne per year Tuticorin smelter combined with longer-than-expected outages due to upgrades at Chilean smelters has freed up more concentrates.
This has allowed the country to step up imports of raw material even as overall mine supply growth has ground to a halt.
Concentrate imports rose by 8.3% to 17.9 million tonnes, bulk weight, in the first 10 months of this year, according to the latest customs data.
But higher imports have come at a price.
Spot TC/RCs, used in smaller and shorter-term deals, fell to seven-year lows of $52 per tonne in August and September with only the mildest of bounces since then.
The annual terms for next year reinforce the message that right now there is not enough concentrate to go around.
That is causing extreme margin compression at copper smelters.
Jiangxi Copper Co’s vice president of trading Xu Yuanfeng has publicly stated the company is currently losing money and needs TC/RCs of around $75 a tonne and 7.5 cents a pound to break even.
Zhai Baojin, president of Daye Nonferrous Metals Group, said his company’s threshold was a little lower at $72.50 a tonne and 7.25 cents a pound but even that level is a long way off current spot prices and next year’s benchmark.
Low treatment charges are being compounded by weak pricing of sulphuric acid, an important by-product stream for copper smelters, and flat premiums for physical refined metal sales.
In times past Chinese smelters would have looked to offset a tight concentrates market by lifting the amount of scrap input in their refining mix.
This time around that’s not possible as China’s scrap imports continue to slide due to Beijing’s steady tightening of purity rules.
Copper scrap imports slumped by 32% in the first 10 months of 2019 with quotas being tightened yet further for the closing months of the year.
There will be a temptation for smelters to simply grit their teeth and keep operating until mine supply improves.
The ICSG is forecasting a 2.0% pick-up in global mine production next year, but this being copper, don’t hold your breath.
The risks are very much to the downside of that forecast, particularly given the social unrest sweeping through key producer Chile and the mix of social, financial and infrastructure issues facing producers operating in Africa’s Copperbelt countries of Zambia and the Congo.
The only other possible response to the smelter margin squeeze is for smelters either to close capacity or accept a collective drop in capacity utilisation.
Neither will be palatable to China’s producers but the 2020 benchmark TC/RCs mean they may have little choice.
This year’s supply problems may not be evident from the current price of refined copper but they are already in the mix for next year’s price.
Editing by Alexandra Hudson