Copper supply rethink as smelter treatment charges fall

Chilean copper miner Antofagasta ANTO.L last week inked the first major 2024 concentrates supply deal with China’s Jinchuan Group.

It remains to be seen whether the terms form an annual benchmark for others. Indeed, it’s far from certain there will be a single benchmark for next year due to a shifting copper concentrates landscape.
But even so, the drop in headline treatment and refining charges (TC/RCs), the fees a smelter earns for converting concentrate into refined metal, has taken the market by surprise.

Next year was supposed to be a year of raw material surplus, with smelters enjoying TC/RCs equal to or better than this year’s benchmark of $88 per metric ton and 8.8 cents per pound.

Those negotiated by Antofagasta and Jinchuan came in at $80 and 8.0 cents, suggesting both miner and smelter agree the concentrates market will be tighter than expected.

SPLIT BENCHMARK?
Other members of China’s Copper Smelters Purchase Team, a grouping of the country’s biggest players, have rejected Jinchuan’s terms as a benchmark.

They are holding out for higher TC/RCs from U.S. producer Freeport McMoRan FCX.N, with which they have agreed benchmark terms in years gone by.

The problem is that Freeport will have less concentrates to sell from its Grasberg mine in Indonesia next year.

Its new Manyar copper smelter will start ramping up from May. The plant is the largest single-line smelter in the world, capable of producing 600,000 tons of refined cathode each year once at full capacity. It will also absorb 1.7 million tons of concentrate that would otherwise have been exported.

Freeport’s local subsidiary is trying to get an extension of its concentrates export licence beyond May, but even if it is successful, the flow of Grasberg concentrate to the international market will steadily diminish over the course of 2024.

Chinese smelters may be able to get better treatment terms from Freeport but the volume of tonnage that can be allocated over the full year is uncertain.

There is the distinct possibility that there will be a split benchmark in 2024 as the previous benchmark setter transitions from miner to refiner.

DISRUPTION
This year’s round of annual supply contracts is taking place against a backdrop of significant copper mine disruption.

First Quantum’s FM.TO Cobre Panama mine has been at the centre of unprecedented protests, which have snowballed from environmentalist groups to encompass large swaths of the country’s population.

The mine, which last year produced 350,000 tons of copper in concentrate, is winding down operations ahead of a potential complete suspension due to a blockade of its main port.

In Peru, meanwhile, MMG’s 1208.HK Las Bambas mine, which last year produced 250,000 tons of copper in concentrate, is facing indefinite strike action due to a dispute over profit-sharing with unions.

The twin threat to supply sums up a year of under-performance by the world’s copper mines.

In September the International Copper Study Group (ICSG) downgraded its mine production forecast for this year from 3.0% to 1.9%.

It cited a litany of disruption including “geotechnical issues, equipment failure, adverse weather, community actions, a slower than expected ramp-up of projects, revised company guidance and lower grades”.

Spot TC/RCs have recently fallen to $76.30 per ton and 7.63 cents per pound due to the collective supply hit, according to Fastmarkets.

TOO MANY SMELTERS?
The short-term disruption shouldn’t in theory impact next year’s benchmark settlements.

Indeed, the ICSG is expecting mine supply to recover strongly in 2024 with forecast 3.7% growth as new capacity ramps up and production rates recover from this year’s operational constraints in countries such as Chile, China and Indonesia.

However, even assuming copper mine supply has a less disrupted year, it may not be enough to satisfy growing smelter demand.

Indonesia’s Manyar smelter is only one of several new smelters due to come on line in 2024.

Most of the new capacity will be in China, where refined production is already growing at a double-digit pace as smelters capitalise on this year’s higher benchmark treatment charges.
The pace of expansion is likely to accelerate after the Chinese government hinted it may introduce a capacity cap similar to that already imposed on the country’s aluminium smelters.

Details are still sketchy and no formal decision has been made, but the threat alone is likely to spur the build-out of more new smelter capacity as everyone rushes to beat the as-yet unknown deadline.
The prospect of too many smelters chasing a finite amount of raw material is at the forefront of many Chinese producers’ minds.

“The challenge smelters are facing is the annual supply of copper ore and concentrate, given copper smelting is developing very aggressively in China,” Chen Yunian, vice president at Jiangxi Copper 600362.SS, China’s biggest operator, said at the CRU World Copper Conference Asia

Fear of physically missing out is also driving an increase in corporate activity in the copper mining sector.

MMG this week announced a $1.88 billion takeover of Canada-based Cuprous Capital, the parent company of the Khoemacau copper mine in Botswana.

It’s unlikely to be the last, as competition between China’s smelters heats up.

The prospect of a structural imbalance between mine supply and smelter demand is likely why Jinchuan accepted lower-than-expected processing fees for next year.

Whether it turns into a benchmark remains to be seen, but it’s already a sign that the expected big surplus in the copper concentrates market may prove elusive.
Source: Reuters.

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