Copper concentrate benchmark structure at risk in current market

The influential annual treatment and refining charge (TC/RC) benchmark that sets the price that smelters charge miners to process their copper concentrate could be at risk, according to multiple market sources, although most believe the system, or elements of it, will remain

TC/RCs are discounts paid to smelters for turning copper concentrate into refined metal. Typically, the fees drop amid tight supply and increase in a well-supplied market.

Most miners and smelters tend to follow an annually agreed benchmark number for their long-term contracts, which is set during supply negotiations between major Chinese smelters and international miners in the last quarter of the year for the following year.

The negotiations often start around London Metal Exchange week in London in October and are finalized around CESCO week Asia, which takes place in November.

The most recent benchmark agreement was settled between Chilean miner Antofagasta and Chinese smelter Jinchuan at $80 per tonne in November 2023. This number was then followed by Freeport-McMoRan, which offered to supply Chinese smelters with copper concentrate at the same level.

But by the start of 2024, spot TCs were at $53.50 per tonne – some 33% lower than benchmark levels – and have continued to decline rapidly since. Spot TCs are now at $(2.60) per tonne.

Questions around the benchmark format

The wide disparity between current spot levels and the benchmark has led to market participants calling into question whether the benchmark format will be followed for 2025.

According to one miner source, the benchmark is “a structure in jeopardy” and others agreed. Meanwhile, a major miner said it was exploring other options other than following the annual benchmark to sell its 2025 tonnage.

The reason this disparity is leading to uncertainty over the benchmark structure is because miners perceive that they are losing out on some benefit of the low TCs due to having signed to the benchmark.

Beyond the challenges of the fast-moving spot market, participants noted that negotiation challenges could arise if the spot market remained close to current levels for the remainder of the year.

The current low spot levels, which are close to zero, would lead to miners wanting to sign at similarly aggressive numbers, according to sources. Numerous trader and miner sources told Fastmarkets they expect miners to seek annual deals in the $40s, $30s or even $20s per tonne.

But smelters would be unlikely to sign deals at such low levels, viewing them as financially unsustainable and of little benefit, with reliance on the spot market likely to make more sense, sources said.

“If the market stays where it is, there is no space for the benchmark,” a trader source told Fastmarkets. “Miners may as well stay on spot and smelters won’t sign at a loss.”

This could prove to be a fundamental impasse: miners would likely be unwilling to sign a benchmark at an unfavorable level, unable to justify such a move to their shareholders, but smelters would be unwilling to sign at loss-making levels.

“We will not be the ones to subsidize the smelters,” a second miner source said, pointing out that mines are subject to swinging market forces due to movement in the London Metal Exchange price so why should smelters be shielded from such factors.

“Should we agree close to $50 per tonne to support smelters? Why should we be the ones to save you?” they added.

Still, smelters continue to see the benefit of the benchmark system despite the potential challenges in agreeing numbers, with many believing the 2025 benchmark will be agreed.

“I think [traditional] miners and main smelters will go with the benchmark system,” one smelter source told Fastmarkets. “This year, the system will face a big challenge following the tumble in spot copper concentrates, which will add difficulties [for both sides] reaching a deal, but finally the two sides will find a way out.”

The situation for smelters is also not helped by challenges beyond TCs, with copper premiums weak, energy and labor costs still elevated and financing remaining high.

Miner and trader sources repeatedly highlighted that some of the issues facing the market are caused by smelters expanding more rapidly than concentrate supply.

“Most challenges are coming from increased Chinese smelter capacity,” a second trader told Fastmarkets, with mine and trader sources echoing this aspect of the challenges when discussing potential issues with benchmark negotiations.

Continued benefits of benchmark system

Despite the challenges, many market participants pointed to the huge number of benefits of the benchmark system, with the majority expecting it to stay in place in some form.

“All the miners want a benchmark; people like to have the benchmark,” the second miner source told Fastmarkets.

“Many miners say they will continue with the benchmark system,” a third miner source said, while others stated that the industry was not in need of a massive overhaul based on the first four months of 2024.

“You don’t have to change the whole industry structure [due to current challenges],” a third trader said. “I don’t see the benchmark vanishing too soon.”

The benefits of a benchmark system are multi-fold, with the financial security of a benchmarked system allowing participants from across the markets, particularly smelters, to plan their economics for the year. This increased financial certainty also helps with borrowing and investment planning, sources pointed out.

“Long-term financing can be justified by reference to certainties given by following the benchmark,” the second miner said.

The benchmark also helps with broader logistics by creating an element of certainty, helping market participants plan the logistics of their business.

“It isn’t just about TC level, it’s about logistics and the simplification of business,” the first trader said, noting that issue resolution under fixed longer-term fixed contracts was simplified.

“The annual benchmark system will stay; we need the number to be planning ahead. The majority of the market is on the benchmark,” a second smelter source said.

Sources also noted that multi-year contracts are often signed to follow the year’s benchmarks and the industry would have interest in a benchmark for that reason too.

What are the alternatives?

There are a number of alternatives to using a benchmark system: benchmarks could be agreed more regularly; smelters and miners could agree contracts privately with the market following no set level; participants could increase focus on the spot market, putting less tonnage into contracts generally; and tonnage could be agreed at “floating levels” signed to an index. Or a combination of benchmark and other systems could be used.

Multiple sources suggested that a benchmark could be negotiated quarterly or for each half, rather than annually. This would reduce the extent to which terms can get out of line with spot levels.

“If they want to follow their market, they can do quarterly contracts,” the third trader said.

Multiple miner sources also said that the benchmark system gave an unfair advantage to miners with less sought-after or less ‘clean’ concentrate.

“It’s not fair,” the second miner source told Fastmarkets, noting that the benchmark system meant that concentrates with a different value on the spot market would be traded at the same level in a benchmark setting.

A fourth miner noted that some companies would pursue private negotiations going forward to secure what they saw as fairer value for their concentrate.

Spot indices could become increasingly important in copper concentrate contracts, multiple sources suggested.

Indices, such as Fastmarkets’ weekly calculated copper concentrates TC index, cif Asia Pacific, report on spot market movements.

Market participants can sign index-linked contracts so that their long-term contracts are tied to spot levels.

Such a system would be beneficial because participants’ deals would follow the market level more closely and avoid any potential impasse in negotiations.

Despite following spot levels, the index-tied contracts also give some needed stability because long-term contracts simplify logistics and also guarantee smelters, traders and miners some consistent liquidity.

Multiple sources said they intend to use or are already using indices for some business, but others pointed to the risks and challenges to signing to an index.

Firstly, it would be hard for market participants to plan financially if signed to an index because their TCs would be an unknown, leaving them with uncertain revenue, sources said. Although some pointed out that indices are more broadly used in other metals markets and that such systems can work.

Secondly, signing to an index was a potential risk for smelters should TCs fall too low.

“An index is a big risk for smelters,” a fifth miner said, while the second trader said it would be “stupid to use an index; it’s bad for industry and puts undue pressure on smelters.”

Using an index would likely be paired with set terms, according to sources.

“We may see some on index, some on benchmark,” the third trader said.

Although multiple sources highlighted using an index as an option, many viewed the chances of 100% of concentrates tied to an index as unlikely, but there may be some percentage of tonnage allocated in that way.

Some sources said that different regions could be more or less accepting of index, with the fifth miner telling Fastmarkets that European smelters would likely prefer certainty in contracts.

“Europeans will try to hold to fixed number – Europeans like to plan,” the fifth miner said.

Sally Zhang in Shanghai contributed to this article

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