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General Market Commentary
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General Base Metals
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General Market Commentary
Copper benchmark deal signals shifting supply dynamics in 2019
By Andy Home
LONDON, Nov 22 (Reuters) - Copper supply has surprised this year, but not in the way everyone expected.
It was supposed to be a year of mine disruptions, with the market anticipating that multiple labour contract expiries would result in at least one strike, and possibly more.
In the event there was none.
By copper’s standards it has been a remarkably smooth year for mine production, leaving analysts struggling to fill the customary collective allowance for disruption in their forecasts.
There has been plenty of disruption, but it has taken place at the smelting-refining stage of the copper production chain, roiling the refined metal market and allowing smelters to feast on a rare abundance of raw materials.
This dynamic looks set to change again next year, judging by the benchmark copper concentrate terms set by Chilean miner Antofagasta and China’s Jiangxi Copper.
Graphic on copper concentrates benchmark terms 2006-2019:
FRAYING BENCHMARK
The headline deal between the two companies for 2019 is for Jiangxi to receive a treatment charge (TC) of $80.80 per tonne and a refining charge (RC) of 8.08 cents per pound for converting Antofagasta’s concentrate into refined metal.
That is down from this year’s benchmark terms of $82.25 and 8.25 cents and marks the fourth consecutive year of falling treatment charges.
Whether they are really “benchmark” terms is questionable since the whole annual benchmark system for pricing copper raw material is evolving.
BHP Group, which used to take the lead in negotiating the benchmark, has been steadily shifting its pricing strategy towards shorter-dated and spot contracts.
Freeport McMoRan, which has assumed the miners’ benchmark-setting role in the last couple of years, is going to have much less material available for sale next year as its Grasberg mine in Indonesia starts transitioning from open-pit to underground mining.
Step forward Antofagasta to lead the miners this time around.
The company may be a reluctant benchmark setter though. To quote analysts at BMO Capital Markets, Antofagasta has in the past “been able to cut special deals at low TCRC terms for (its) Los Pelambres concentrate, which produces the highest grade among major Chilean mines”. (“Copper: It’s TCRC Time Again”, Nov. 9, 2018).
There is always much latitude in how miners and smelters price off the annual benchmark, reflecting the wide spectrum of concentrates quality and levels of impurity, and this year may well see a wider than usual array of contract terms.
However, for want of anything else, Antofagasta and Jiangxi’s deal is the 2019 benchmark and one that points to significant shifts in the copper supply picture.
MINE SUPPLY SLOWS
The first shift will be a sharp slowdown in growth in mined production.