(The opinions expressed here are those of the author, a
columnist for Reuters.)
* Copper smelter treatment terms: https://tmsnrt.rs/2Re4dSY
* China's imports of copper raw materials: https://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.
MINE SUPPLY SQUEEZE
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)
IMPORTS UP BUT AT A PRICE
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.
SMELTER SQUEEZE
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)