2017 PREVIEW: Copper market preference wavers between benchmark and spot settlement

Discussions about the merits of long-term and short-term settlement have persisted since the copper market entered a surplus cycle, with the recent preference for cathode likely to tip back to contract in 2017.

When buyers signed long-term cathode deals with Codelco at $98 per tonne for 2016, they may have been aware of the risks of settling at that price; but none would have expected premiums for the year to finally end at an average in the $60s.

Metal Bulletin-assessed Shanghai copper cathode premiums averaged $64 per tonne during the first eleven months of 2016, 35% lower than the benchmark figure.

In 2015, there was as much as a 50% difference between average copper cathode premiums and the benchmark.

There were requests and complaints from buyers, and more trading houses started offering a floating premium as an option in their contracts. Traditional producers, including Codelco, were also forced to adopt short-term settlements in response to consumer demands and the changing market environment.

However, preference has veered back towards long-term contracts after Codelco’s 2017 premium for selling copper cathode to Chinese customers was labelled “reasonable” by the market, as well as a test of the bottom line in the poor market this year.

Chilean producer Codelco cut the premium at which it will sell copper cathodes to Chinese customers in 2017 by 27% to $72 per tonne on top of London Metal Exchange cash prices, Metal Bulletin reported in November.

Although the producer offered a maximum of 50% of copper cathode on a floating basis to selected customers, very few buyers used up this quota with only some of them keeping 10-30% of their tonnages unfixed for the coming year.

Besides $72 per tonne being considered a reasonable premium figure at current market conditions, a visible bottom line also gives buyers another strong reason to bet on the long-term.

Data from Metal Bulletin shows average copper cathode premiums were below $50 per tonne between May and August 2016. This was attributed to export activities that picked up as a result of incentives from Asian LME-listed warehousing companies, and tolling licences obtained by Chinese smelters that enabled them to re-balance the two markets inside and outside China.

After premiums dipped several times this year, $40 per tonne is a widely agreed to be the bottom line for Shanghai copper cathode premiums in 2017, and downwards risks have become obvious and calculable.

Following loud criticism over the benchmark premium figure during the past few years, a mixed pricing mechanism combining benchmark and a floating premium is turning out to be the solution to the latest market demands. Nevertheless, the ratio of benchmark to floating settlement will continue to change along with fundamentals in copper.

Copper concentrate settlement
Similar fluctuations in preference for long and short-term settlements also appeared in the concentrate market, but in the reverse of cathode.

During annual negotiations this year, Freeport-McMoRan signed treatment and refining charges (TC/RCs) at $92.5 per tonne and 9.25 cents per lb for 2017 with Jiangxi Copper.

It could take time for other miners to follow Freeport and Jiangxi’s 2017 TC/RCs because the figure is not considered as the “real” number as Freeport is going to cut as much as half of its long-term tonnages supplied to smelters during the next two years, Metal Bulletin reported in April this year.

A similar step was taken by another miner to reduce its long-term volumes, but this has also compromised the TC/RC number.

Last year, Freeport took a month to follow the figure agreed between Jiangxi and Antofagasta, and Freeport kept an option to reduce its fixed tonnages by 20%.

For miners, agreeing annual TC/RCs is not only a fight to be the leader in benchmark talks, but is also closely connected to controlling the performance as a result. Miners could secure more favourable prices through short-term settlement either in spot cargoes or via tenders, whilst the potential of a tightening copper market around the corner is also a consideration.

Miners testing shorter-term settlements
At the moment, long-term copper concentrate contracts remain the dominant method for most mining companies, although more of them are either thinking about or testing shorter-term settlement with small volumes as a first step.

Releasing stocks to traders in tenders at the beginning of this year has been viewed as successful by some mining companies given rising TC/RCs since the middle of the year. Destocking relieved miners’ cash flow pressures and gave them the upper hand in annual contract negotiations at year-end when the market lacks spare cargoes but has limited stocks left.

The Metal Bulletin copper concentrate index averaged $94.8/9.48 cents during the first eleven months of 2016, 2.6% lower than the 2016 benchmark.

BHP Billiton was the first miner to move towards spot settlement. As more miners are preferring to settle deals based on their own business strategy and production plans, big questions remain on the sustainability of the current pricing system.

Tonnage reduction on long-term contracts is already widely discussed by both sellers and buyers who agree there will be a slight copper concentrate supply surplus in 2017. How the market will change once the market moves into balance or deficit in 2019-2010 will undoubtedly be a critical issue in future negotiations.

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