Negotiations for benchmark treatment charges and refining charges (TC/RCs) for annual copper concentrate supplies in 2017 will start during LME Week, with a settlement widely expected at around $95-102 per tonne and 9.5-10.2 cents per lb – either side of this year's level.
Chinese copper smelters are widely expected to offer US miners three-digit TC/RCs, believing that mine supply will exceed growth in smelter capacity in 2017.
"The expansion of several major mines in South America has more than offset the increase of smelting capacity in China,” a member of the Chinese Smelters Purchase Team (CSPT) said. “We think a three-digit figure is fair."
The fourth-quarter price floor of $105/10.5 cents set by CSPT late in September is also an indicator of smelter expectations about the annual benchmark.
Spot TC/RCs were lower earlier this year before new mining capacity came on-stream mainly around mid-year, a second smelting source said.
While the spread between miners’ offers and smelters’ bids is usually around $40 at the start of talks, it will be narrower this year and the negotiation process is likely to be shorter, according to speculation.
The difference between smelter/miner and trader/miner deals has also narrowed to $6-7, from $14-15 in March, past data shows.
The Metal Bulletin copper concentrate index averaged $94.7/9.47 cents during the first nine months of this year, bottoming out in March at $82.4/8.24 cents and peaking at $103.4/10.34 cents in mid-July.
Miners, however, believe TC/RCs are capped close to current levels, claiming that production increases have peaked this year, more smelter projects will come online next year and this year’s abnormal infrequency of mining disruptions will not be repeated in 2017.
According to Metal Bulletin calculations, global smelting capacity will climb by around 500,000 tonnes per year (tpy) in 2017, including two new 100,000 tpy projects in Zhejiang and Qinghai, while some existing projects will ramp up output.
While most smelters expect a higher processing fee, many doubt it will exceed the 2015 settlement of $107/10.7 cents.
"It was maybe a bit too high last year… 2015 and 2016 could have been on the same level," a smelter source in Europe said. “[Above] $100/10 cents would have been a good level for both years… I see no argument why it shouldn't be the same for 2017 - a little higher could be possible."
One major Chinese smelter described a settlement above $105/10.5 cents as "hardly likely", anticipating a softer market next year compared with the 2015 settlement.
On the spot market, TC/RCs on sales to smelters have risen since February, hitting a 2016 high of $102-106/10.2-10.6 late last month. Spot TC/RCs have averaged $93.9-99.6/9.39-9.96 cents in the year to date.
Benchmark leader: Freeport or Antofagasta?
Late last year, Antofagasta and Jiangxi surprised the market by locking in TC/RCs first – Freeport followed suit a month later at the same level, after talks with CSPT.
Antofagasta will follow its own path this year and has no reason to wait for others to agree first, a source close to the matter claimed.
"It's all about volume,” one concentrate trading source said. “One of the concerns for Freeport about following Antofagasta's lead last year was… whether the latter has big enough volume to represent the market.”
One representative on each side usually heads annual discussions between miners and smelters; Freeport and Jiangxi typically take the leading roles.
But with availability of Freeport material due to drop once its second smelter is built in Indonesia around 2017, absorbing all of the concentrate production from its Grasberg mine, some have called for another miner such as Antofagasta to step up.
Antofagasta expects its copper production to be at the lower end of the 710,000-740,000 tonnes guidance it provided in January.
"It will be interesting to see who will settle first,” a smelter source said. “I can imagine Antofagasta would not like to wait for Freeport's settlement,"
Freeport is also in talks with CSPT members on significant cuts to its annual copper concentrate supply contracts over the next two years. Some buyers have been offered a 50% reduction plan for the coming year.
"For example, they want to [halve] copper concentrate supply to us,” a CSPT source said. “The first cut will be 20-30% in 2017 and then jump to 50% for 2018."
"Some smelters… will have the cuts in one go and with less significant tonnages," a source close to the matter said.
If Chinese smelters agree to the cuts, annual supply tonnages into China will fall to 500,000 tonnes or below, from around 1 million tonnes.
Freeport produces around 6 million tpy of concentrates – total global output is more than 17 million tpy – from mines in South America (Cerro Verde) and North America (mainly Morenci) as well as Grasberg. But it consumes 2 million tpy for its own smelters in Spain (Huelva), Indonesia (Gresik) and the US (Miami).
Freeport, which pledged mine output cuts of 158,758 tonnes in 2016, had been keen on securing a lower TC/RC benchmark than Antofagasta. But market participants believe it could struggle, given the quality difference between Freeport's concentrate from Grasberg and Antofagasta's Pelambres material, which is higher in copper content and lower in gold.