How copper’s mine-supply crunch is driving prices to record highs

London Metal Exchange three-month copper futures hit $10,720 per tonne in May amid disruption from the Covid-19 pandemic and political tensions affecting material supply from mines.

Treatment and refining charges (TC/RCs) are the fees for processing ores and concentrates into refined metal - a key revenue stream for smelters. When demand for copper is high but the supply of raw materials from mines is reduced, smelters lower their fees to secure supply.

Supply chains have been particularly disrupted over the last year after the coronavirus pandemic limited mining activity in key global regions, supply chains were disrupted and political clashes cut off some key trade routes.

With TC/RCs at decade lows, smelters are questioning whether they can maintain output, which is helping push copper exchange prices to all-time highs..

LME copper 3M official

Fastmarkets wants to provide a greater understanding of this key area of the market. In April we introduced smelter and trader purchasing coefficients based on our copper concentrates benchmark index. Our index has shown that over the past year market conditions have pushed charges down.

Treatment and refining charges tumble

In early April 2021, Fastmarkets’ copper concentrate index showed trading was at its lowest level since 2013, a 61% year-on-year decline.

Copper concentrates TC index

This is in contrast with where prices were in early April 2020 after the Covid-19 pandemic created uncertainty around future demand. So, while prices were at their highest in a year, concentrate holders cut their long positions and sold some material to smelters.

Constrained supply

The drop in TC/RC reflects a lack of mined copper supply available on the spot market. Chinese imports of copper concentrate dropped by 1.9% year on year to 21.76 million tonnes in 2020, the first decline in imports since 2011.

Some of this was due to there being a disconnect between demand in China and mining supply elsewhere over 2020. Strict lockdowns enabled China to make a swift recovery from the pandemic last year but key producers such as Chile and Peru continue to be affected, even in 2021.

China copper concentrate imports

Rising trade tensions between China and Australia also further exacerbated this supply gap.

At the end of October 2020, Chinese smelters and traders were verbally instructed to stop buying material - including coking coal and copper - from Australia. In 2019, Australian copper accounted for 5% of China’s copper imports, the fifth biggest supplier behind Chile, Peru, Mongolia and Mexico.

Chinese smelters have already faced hurdles importing material from the United States since 2018 because materials have been subject to import taxes as part of Donald Trump’s Section 232 order.

Demand increases

Chinese copper smelters have been expanding aggressively over the past decade, which has led to extreme competition for overseas copper concentrate and has put the industry in a fragile procurement position, Fastmarkets understands.

In 2019, China’s copper capacity reached 12.59 million tonnes per year yet the utilization rate was only 77%, an executive said at the ‘twin session’ meetings of the Chinese People’s Political Consultative Conference and the National People’s Congress.

This is a three-fold increase from the country’s copper output level a decade ago, which, according to official Chinese customs data, stood at 4.1 million tonnes in 2009.

Despite having some unused existing capacity, China has continued to build new copper smelting facilities and in 2021, refined copper capacity is set to reach 14.22 million tonnes. This, in turn, would suggest there is a growing appetite for copper raw materials.

Talk of cuts could boosts prices
On May 10, China’s Copper Smelting Purchasing Team (CSPT) - a group of 15 state-owned smelters - agreed to cut output by 300,000 tonnes.

The output reduction order follows the low TC/RCs received for spot purchases because these low charges make processing concentrates into metal unprofitable, sources said.

“Chinese smelters are acting in response to the current tight copper concentrate market,” one market source said.

“When you have tight concentrate conditions it spills over into the refined market and, therefore, on prices,” Fastmarkets’ copper analyst Boris Mikanikrezai said. “There’s a strong relationship between the price and the copper concentrates index, the strongest of which has a 12-month lag so [low TC/RCs] are clearly bullish for the copper price long term.”

Fastmarkets’ research expects low TC/RCs for the next few months and for the low TC/RCs to affect smelter margins, which may mean further production cuts for smelters despite rising demand. So this will continue to support high copper prices.

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