COMMENT: What next for copper TC/RC benchmark as Antofagasta begins breakaway?

This week, beginning Monday July 8, has seen one of the world’s biggest copper miners, Chile’s Antofagasta, begin to break away from the traditional annual price benchmark system by sealing an early deal with Chinese smelters to supply concentrates for the first half of 2020.

The deal has raised questions in the market over the viability of the annual copper concentrate treatment charge/refinement charge (TC/RC) benchmark system long before October, when negotiations typically start.

Every year, the world’s major copper miners and smelters meet between October and December until they agree on the TCs/RCs they will use to buy and sell clean concentrates in the following year.

This so-called benchmark has been in place for more than 30 years and has withstood many challenges, not least when miner BHP broke away from it in 2011 to push for shorter-term sales, and several occasions when Japanese smelters refused to use the annual benchmark.

This time, Antofagasta has agreed - at least four months earlier than expected - a deal with China’s two largest copper smelters, Jiangxi Copper and Tongling Nonferrous.

It will supply concentrates at a TC/RC price in the mid-$60s per tonne/6 cents per lb from January until June next year, as Fastmarkets reported on July 11. One well-informed source said on the same day that the exact level agreed was $64 per tonne/6.4 cents per lb.

“It will be interesting to see how things play out in the next 12 to 18 months,” a mining source said. “This is not the end of the benchmark system, but it’s a step in that direction.”

Unconventional move
The surprise agreement was agreed four months ahead of the Cesco Asia Copper Week in November, when major miners and smelters typically sign up to the annual TC/RC term that serves as the benchmark for the significant majority of the global industry.

A veteran miner source described it as “definitely a settlement done in a non-traditional fashion” and “another major move toward the elimination of the benchmark system.”

“Clearly, Antofagasta is looking to distance itself from the traditional timing and tenor of agreements, where the so-called benchmark is expected to apply to everyone - which doesn’t provide for a value proposition for buyer and seller,” the source said.

“It has now moved on to do a settlement on its [own] terms; shorter tenor, and at a TC/RC it feels is reflective of the period when it is to be delivering,” the source added.

This is not the first occasion when Antofagasta has challenged the status quo. In 2015, the Chilean miner took Freeport’s place as the leading miner negotiating the annual TC/RC benchmark, to sign a deal with Chinese smelter Jiangxi Copper.

Antofagasta lost the driving seat to Freeport in the following two years before regaining its place as benchmark settler in November 2018, with an agreement with Jiangxi Copper at a full-year TC/RC level of $80.8 per tonne/8.08 cents per lb in Shanghai.

Antofagasta’s flagship mine, Los Pelambres, produces concentrates of high purity and thus tends to get better terms on the spot market. This is another reason why the miner has been reluctant to use a benchmark TC/RC number that reflects slightly lower-grade material.

In the past several years, the miner has sold cargoes from Los Pelambres via tender to traders as a way of capturing a premium over the annual benchmark price.

Why now?
Although the signing of this contract has surprised the market, the timing of it is logical. It comes at a time when miners have the upper hand in negotiations with smelters, because copper concentrate is in tight supply and TCs/RCs are falling.

“We know that copper TCs/RCs will come under further pressure, and that competition between smelters, especially in China, is increasing. So it’s not a surprise [smelters] wanted to secure tonnages early. Volume matters more than the price, at present,” a third mining source said.

Fastmarkets assesses a spot market copper concentrate TC/RC index, which calculates a middle-number between where traders and smelters purchase material, as well as normalizing different types and grades of concentrates.

This copper concentrates TC index, cif Asia-Pacific, $ per dmtu, was $52.40 per tonne/5.24 cents per lb on July 5, down by 40.5% since last November and now at its lowest level since it was launched in 2013.

Chinese smelters were buying spot parcels with TCs in a range of the low $50s to low $60s per tonne last week, while traders were paying even more, with TCs lower by $8.6 per tonne on average.

These low levels, which come as smelters in China have been undertaking an unprecedented expansion in building new capacity, indicate the increasing competition for copper concentrates. They are also squeezing the margins in the global smelting industry, which are already under immense pressure due to weak prices for sulfuric acid and soft copper premiums.

“Antofagasta has been trying to adopt this sales structure [of half-year contracts] for the past three years,” a Chinese copper smelting source told Fastmarkets. “It could maximize profit by not selling the tonnages at benchmark for the whole year. Now is the time to make the Chinese say ‘yes’ - TCs are expected to drop, with smelters eager to secure tonnages for next year.”

In this context of tightening supply, it has become harder to book tonnages of concentrates on a long-term basis, and some smelters have become keener to consider all the available options, including the use of Fastmarkets’ spot copper concentrate TC/RC index as a fall-back option if no agreement can be reached.

Future of the benchmark
Tightness in concentrate supply is pushing some Chinese smelters toward signing deals at unusual times and terms, to secure material early, but smelters in other regions may not share the same concern. So the benchmark system will very probably continue to exist as an option for many years to come.

“The Chinese smelters are desperate to secure concentrates to reduce their reliance on refined copper and scrap. But the Japanese, [South] Korean and European smelters will probably be keen to sign benchmark agreements in the fourth quarter,” the first mining source said.

When BHP moved away from the benchmark system by offering six-month pricing in 2011, it continued to offer annual benchmark contracts to some customers. In fact, these have only recently come to an end, with BHP now mostly selling on a half-year or quarterly basis, Fastmarkets understands.

Antofagasta is also unlikely to stop at a one-off half-year contract, with sources indicating that a contract for the second half of 2020 is likely to be negotiated during Asia Copper Week in November this year, while annual TC/RC contracts will also remain on the table, Fastmarkets understands.

In addition, United States-based miner Freeport, which has traditionally eschewed shorter-term pricing mechanisms to sell its concentrate, remains in favor of agreeing annual numbers, Fastmarkets understands.

“The annual benchmark is still a valid system for some,” the third mining source said. “The market is not yet so volatile that it needs quarterly or half-year pricing, but things can change.”

Mid-$60s too low for 2020 benchmark
A lot can happen in the next four months, but while the figure of $64 per tonne agreed for the first half of 2020 will probably not be regarded as a benchmark for the whole year, it could serve as an indication or even as a starting point for miners during annual contract negotiations, sources said.

“It has largely set the tone for our negotiation of first-half procurement in the next year, yet I doubt that it will be used in the [annual] contract. It should be seen as a reference, which has indeed narrowed the gap in the negotiations,” a source with the 10-member China Smelters Purchase Team (CSPT) said.

“The interpretation of this mid-$60s number will certainly be on the meeting agenda of CSPT next week. Some of the members are not going to be happy,” the second smelting source said, while a third warned against seeing a half-year number as an indicator of long-term fundamentals.

Although the annual benchmark for 2020 will probably be lower than this year’s level of $80.8 per tonne, it is difficult to imagine that it could fall as low as $64 per tonne.

“Miners might try to get a number close to $64 per tonne, but it will be very difficult, even unprecedented,” the third mining source said.

It will be interesting to see which of Freeport and Antofagasta will be the annual benchmark settler this year. Freeport is reputed to have a more moderate approach in its negotiations, possibly because it is both a miner and a smelter, and is not keen to sell concentrates on the spot market. But Antofagasta is generally more aggressive and unafraid to begin talks at very low TC/RC figures.

“Freeport has a good reputation among the smelters. If they have agreed on a different TC number for 2020, it is likely to be seen as the benchmark. Yet it has less tonnages to offer now,” the third mining source said.

Freeport has indeed less and less tonnage to sell to smelters, due to the sharp fall in exports from its Indonesian mining operations at Grasberg. This makes Antofagasta appear to be a better choice to represent global miners in TC/RC negotiations in future.

Antofagasta, Freeport, BHP, Jiangxi Copper and Tongling all declined to comment on this subject at the time of publication.

Perrine Faye and Archie Hunter in London contributed to this article.

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