Copper concentrate TCs still negative: how? And what does it mean for copper prices?

Copper concentrate treatment and refining charges have repeatedly fallen to record-low levels over the first five months of 2024

Most recently, Fastmarkets’ copper concentrate TC index, cif Asia Pacific, fell to $(4.10) per tonne on Friday May 31. This compared with $89.20 per tonne on August 4, 2023, which was a five-year high.

Alongside this, the London Metal Exchange three-month copper price hit an all-time high of $11,104.50 per tonne on May 20. Fastmarkets heard that the tight concentrate market was among the reasons for this.

The big movements in both the TC/RCs and the LME copper price have led to an increased market focus on copper concentrate treatment and refining charges. But some sources have said that the current dynamics of copper concentrate supply and demand may mean that the effect on the supply of refined material may not be particularly significant.

How did they get so low?

Copper concentrate TCs have come under notable pressure since November last year. The closure of First Quantum’s Cobre Panama mine is often cited as the main reason for this.

Cobre Panama produced 350,438 tonnes of copper concentrate in 2022, but late in November 2023 the contract to operate the mine was decreed unconstitutional by Panama’s Supreme Court of Justice. This forced the mine to close.

Within two months of the announcement, Fastmarkets’ copper concentrate index had fallen by more than half to $22.70 per tonne on January 26 this year, compared with $76.30 per tonne on November 17, the last assessment before the closure of the mine.

Production challenges affecting the copper industry go deeper than Cobre Panama’s issues, however. Sources across the industry have told Fastmarkets that a number of miners are facing challenges in producing copper. Notable among them is Anglo American’s Los Bronces mine, which is seeing reduced output due to “planned lower ore grades and ore hardness,” according to the company’s production results published on April 23 this year.

But a significant number of miners are struggling beyond such headline examples, with a number of miner sources telling Fastmarkets that their own production has been weak in recent months.

Beyond this, expansions in global smelter capacity have also created issues for the concentrate supply-demand balance. Such expansions in Indonesia, India and China have led to a need for more concentrate to feed this capacity in 2024 and 2025.

In 2023, before the bulk of the expected Chinese smelter capacity expansions came online, industry sources told Fastmarkets that they did not believe there would be enough concentrate to supply the expanded capacity.

“The main question will definitely be how Chinese smelters will secure the raw materials to ‘feed their new mouths’,” a miner told Fastmarkets. “There are not many new mines in the pipeline.”

Addressing this subject, Andrew Cole, Fastmarkets’ principal analyst for base metals, said in May last year: “When you consider the smelter capacity being built outside China – in the Democratic Republic of Congo, India and Indonesia – overall there will be too much smelting capacity chasing too little concentrate supply.”

Smelter expansion and concentrate challenges were evidently having an effect on the market because TCs continued to be unprecedentedly low.

Why are smelters willing to pay such low levels?

Supply-demand dynamics do explain how TCs dropped to such low levels. But, in theory, smelters are paying more than the value of the refined copper to buy copper concentrate. This issue is especially interesting considering that copper premiums in China are currently at a discount to those of the LME.

To use an analogy, it is equivalent to flour being more expensive than bread.

Market sources have told Fastmarkets that, despite the spot smelter buying price being close to $0 per tonne, smelters cannot be profitable with TCs at this level.

Fastmarkets’ calculation of the copper concentrates TC implied smelters purchase index, cif Asia Pacific, was most recently at $0.335 per tonne on May 31.

If smelters cannot be profitable with TCs this low, why are they buying at these levels?

It is because a large percentage of smelter purchases are in fulfilment of annual or long-term contracts. And the 2024 copper concentrate benchmark was agreed in mid-November at $80 per tonne.

Industry sources have told Fastmarkets that a significant majority of their concentrates supply comes in at benchmark TC levels. They said that some smelters, especially in Europe, would have close to 100% of their needs supplied under such long-term contracts.

To calculate an average, when TCs are paid by smelters with 80% of their needs met by annual or multi-year contracts at benchmark, they would be paying roughly $64 per tonne, if spot TCs were close to $0 per tonne.

Essentially, the high benchmark level supports the smelters enough that they can agree extremely low TCs for spot copper concentrate units.

“This year, people have part of their consumption at $80 per tonne, so they can afford to buy some at $0 per tonne,” one miner source said.

“The benchmark is a buffer,” a second miner source said.

This explanation, however, raises the subsequent question of why do smelters not merely operate at a reduced rate, using only the concentrates they get under long-term contracts in their smelters.

It is because smelters have fixed costs that would not be cut by reducing output. Smelters may have hedged their energy costs, signed employment contracts, and have loans to repay, among other fixed costs. These costs would largely remain unchanged, so a reduction in the input amount of copper would not allow smelters to make large savings on costs such as energy and salaries.

“It is cheaper for smelters to pay [a higher price] for a small amount of concentrate than not to be full, [because] that [is even] more expensive,” the first miner source said.

Various industry sources have told Fastmarkets that smelters would want to operate as close to standard capacity as possible, because they get notable efficiency benefits by operating in that range.

There is a benefit to paying high prices for a small percentage of concentrates instead of operating at lower output rates.

Smelters can also make money elsewhere in the market, by selling excess heat, or from by-products such as gold and sulfuric acid. Smelters can also charge premiums on their refined metal.

Also, smelters ordinarily only pay for the majority of copper in concentrates, with sources telling Fastmarkets that the standard level is around 96.5% payability. This means that if smelters can achieve higher recovery levels than this, they will be getting “free copper.”

Several market sources noted that, especially with the recently high LME prices, this free copper can have a potentially large effect on their profitability.

What effect does this have on the copper market?

Along with other factors, the tight concentrate market has been cited as a reason why LME copper prices have recently reached all-time highs.

“If you look upstream, there is a tightness in raw materials, and that tightness is coming to a metal market near you soon,” Duncan Hobbs, head of research at Concord Resources, said.

“The key balance in today’s market is the rate of change in mine supply versus the rate of change in metal demand,” he added.

“Fundamentals are pretty good,” Dan Smith, head of research at Amalgamated Metal Traders, said. “There are challenges to mine supply with the energy transition improving demand. [And although that] demand isn’t booming, it is good enough to be a challenge.”

A number of trade source have told Fastmarkets, however, that they believe that the current spot concentrate tightness is also due to an excess of smelter capacity, rather than just supply tightness.

“[The tightness] is smelter-side only,” one trader source said. This sentiment was shared by sources across the industry, who said that concentrate tightness would not lead to refined tightness, and by extension should not lead to better LME copper prices.

Beyond this, industry sources noted that increased scrap usage in China was protecting the refined copper output.

They noted that smelters were being “inventive” in their attempts to keep overall copper production high and, along with scrap, were investigating the use of secondary concentrates, and other strategies such as the use of gold and zinc concentrates with high copper content.

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