Copper: explaining the TC/RC slide

Tom Price, Joel Cran -

Copper miners’ concentrate processing costs are down 20% year-todate, because of disruptions at key operations. This, in turn, will weigh on smelter revenues, pare smelter output and constrain metal supply – delivering a small boost for the copper price.

Copper’s spot treatment and refining charges (TC/RCs) – a fee that represents about 15-20% of the total cost of production for miners – has fallen 20% year-to-date to $77/t & 7.7c/lb. This is now well below the corresponding annual contract rate for 2015 of $107/t & 10.7c/lb, settled late 2014. The cause of the sharp fall relates almost entirely to disruptions at the mines themselves.

Just like any other market
The level of these processing fees reflects changes in supply/demand for concentrate. Surpluses buoy TC/RCs, while deficits weigh upon them. Right now, various mine disruptions are reporting to the trade. Key custom suppliers under pressure include Collahuasi (Q1 -14% y/y), Antamina (Q1 -19% y/y) and Los Pelambres (Jan-Feb -11% y/y; for a review of the mines at greatest risk in 2015, see ‘No Coppergeddon’ redux, 16-Feb-15).
Also, high demand for ‘clean’ (low impurities; arsenic in particular) copper concentrates for blending has also reduced supply available to smelters. Mines such as Codelco’s Ministro Hales and Southern Copper’s Toromocho produce high arsenic concentrates that require clean concentrate for blending before sale to smelters (arsenic-bearing conc. attract TC/RCs >>$100/t-10¢).

Seasonality matters too
In recent years, a seasonal pattern has emerged in the trade. Volatility in spot terms now tend to lift in CYQ4, as ‘mating season’ prompts strategic plays in order to alter spot TC/RCs ahead of the corresponding annual settlement. For example, some of the decline in TC/RCs since 2014Q3 can be attributed to this behaviour.

Smelter shutdowns = offset
In the near term, planned maintenance shutdowns at several of China’s largest smelters (incl. Jinchuan, Tongling, Xiangguang) and Pasar in the Philippines; a recovery in mine production from first quarter lows; and the further ramp up of production at Toromocho are likely to limit any further decline in TC/RCs.

Concentrate supply outlook
Custom copper concentrate supply is set to expand further in 2016-17 with the start-up of Las Bambas set for mid-2016 and higher anticipated production from Grasberg over the next two years. We forecast an 8-9%yoy lift worldwide, to 16.4Mt of copper-in-concentrate (1%yoy lift in SX-EW; Playbook, 24-Mar-15).
A substantial lift, but the potential for another large expansion in China’s smelting capacity (+12%yoy to 7.9Mt in 2016), along with on-going tightness in copper scrap supply, suggests that smelter demand growth is likely to outpace that for global concentrate supply.

China’s robust April trade
At odds with apparently subdued downstream metal demand, China reported robust April trade figures for copper last week, including stable concentrate imports: 1.04Mt, 20% off Mar-15’s record-high, but still above the rolling 12-mth average (+4%yoy; YTD total of 4.0Mt. What’s behind this lift? A 12% expansion in smelting capacity in 2014 (to 6.8Mt), a fall in domestic mine supply and tightening scrap supply. Secondary feed accounts for around a third of China’s total smelter production, varying on relative prices of the two inputs.

MS copper TC/RC forecast
We continue to forecast a modest decline in contract (clean) TC/RCs, down 2%yoy to US$105/t-10.5¢/lb for 2016, with a corresponding spot metal price forecast of US$6,280/t (2.85/lb; +6%yoy). Our long-term TC/RC terms are US$87/t-8.7¢/lb (real), which becomes active in our forecast in 2021.

Copper’s supply-demand outlook
We forecast a 2.4%yoy lift in global copper refined supply for 2015 to 22.8Mt, which includes a 5.3%yoy expansion in global mine supply to 19.4Mt.
For global refined demand growth this year, we have a 2.4%yoy to 22.6Mt, including China up 2.6%yoy to 10.3Mt (46% of total). Key risks to the demand growth include further deterioration in economic activity in China (bearish); a stimulus event to offset weakness there (bullish); strengthening of the USD (bearish).

Copper price forecast (as at 24-Mar-15)
Our spot price forecast is unchanged: a 13%yoy fall in 2015 to US$5950/t ($2.70/lb vs. YTD avg $5,970/t; $2.71/lb; spot $6,005/t, $2.72/lb), recovering 5%yoy in 2016 to $6,280/t ($2.80/lb), reflecting a forecast deficit for the trade.

Tom Price, Joel Cran – Morgan Stanley & Co.