Major improvements in copper concentrate supply forecast

Last Updated: Mon, Nov 12, 2012 19:41 hrs

India’s two standalone smelters without mine linkages, belonging to Hindalco Industries and Sterlite Industries, have reasons to be happy, with the International Copper Study Group (ICSG) saying the world could see supply surplus of copper concentrate in 2013. That would mark the end of over a decade-long tightness in availability of the mineral for smelting into metal. Principally, on the back of copper mines expansion in Chile and the Oyu Tolgoi copper-gold mine coming on stream, concentrate supply next year, according to ICSG, will see a 6.4 per cent rise.

The world has not seen this kind of supply increment in a decade-and-a-half. Much of the new supply is to come from expansion of existing mines and not greenfield developments. No doubt, copper climbing to $10,000 a tonne in February 2011 on investors piling on to the metal and many experts then seeing the possibility of the price surging to as much as $12,000 a tonne depending on concentrate deficit encouraged miners to give a thrust to their expansion projects. That prices since behaved differently were beside the point.

The likely availability of copper concentrate during a year has an inverse relationship with treatment and refining charges (TC/RC) that smelters will be demanding of suppliers of the feedstock. It, therefore, did not come as a surprise that smelter owners in their meetings with miners at the annual gathering of London Metal Exchange (LME) gave indications of TC/RC of around $80 a tonne to be locked in for term shipments for 2013 against $60 to $63.50 a tonne settled for this year. Perhaps, negotiations to follow will see 2013 TC/RC being settled at $70 plus a tonne. Besides positive supply forecast, smelter owners were emboldened to pitch for higher TC/RC following their securing higher charges for some recent spot deals. Another rejoicing point for them is the world’s biggest miner, Chile’s Codelco, lowering copper premium by $5 a tonne for supplies it will be making to its European clients.

China accounting for about 40 per cent of world copper consumption was in the forefront of demanding higher TC/RC. The supply of ore from local mines falling way short of domestic requirements, China remains a very big importer of both refined copper and concentrate. In the first eight months of 2012, its year-on-year imports of refined copper rose 57.7 per cent to 2.39 million tonnes (mt) and of concentrate 14.1 per cent to 4.6 mt. The metal comes in for use in a big way in wiring, plumbing and manufacturing industry. For a major part of the past decade, Chinese copper use grew by up to 30 per cent a year straining the world supply of concentrate. In fact, as Chinese demand growth for the metal outstripped rises in world mine production, it provided a big prop to copper prices, taking these to record levels at one stage.

Turnaround in the fortunes of government-owned Hindustan Copper was almost entirely due to copper outshining other non-ferrous metals in the decade long commodity super-cycle. The company, largely reducing copper production incurring smelting costs much higher than industry average in favour of stepping up ore output by reviving mines abandoned earlier and also opening new mines, should stand it in good stead in the long run.

As for copper outlook, supply improvement will keep prices in check. In a situation of supply improvement, Chinese demand growth remaining under check could be a market spoiler. As China’s third quarter gross domestic product (GDP) had the slowest pace of expansion at 7.4 per cent since the first quarter of 2009, International Monetary Fund (IMF) has scaled down the growth forecast for the country from its earlier eight per cent to 7.8 per cent. The market was roiled by copper and other base metal producer Xstrata chairman John Bond saying that “there’s been a notable slowdown in China’s demand”. Without providing any details, he said the company had cut production. The Chinese ministry of industry and IT said export uncertainty was “clouding” factory output recovery. At the same time, the ministry is hopeful that the economy will perform better in the final three months of 2012 than in the third quarter. Many in the copper industry are pinning their hopes on China recently sanctioning some major infrastructure projects entailing investments of $156 billion.

European copper major Aurubis chief executive officer (CEO) says: “I think copper demand will pick up as infrastructure projects in China are realised. But I don’t think we will see it this year, but in the beginning of next year.” In an identical vein Codelco CEO Thomas Keller says future urbanisation drive in China will generate “significant” demand for copper. Whether that demand will be in double or single digit, the tonnage will be huge, according to Keller.

Besides China, the difficult macroeconomic scene that principally relate to dark clouds stubbornly hanging over the Euro zone and uninspiring corporate guidance, will have a bearing on all base metals over the next six months at least. Disappointing the market, copper inventories at LME-monitored warehouses have swelled recently. This is unusual since demand in a year’s final quarter is traditionally strong. The development, according to a Societe Generale official, “adds to the negative perception that demand environment remains pretty tough”.

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