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US - Copper smelters win battle but not the war

Reuters reported that copper smelters have won a significant battle against the miners in negotiating a further rise in treatment and refining terms for shipments in the H2 of the year.

Headline rates jumped to a treatment charge of USD 90 per tonne and a refining charge of 9.0 cents per lb from USD 72 and 7.2 cents for H1 shipments. Full year 2011 terms were even lower at USD 56 and 5.6 cents.

Pricing in the copper raw materials market has started to fracture. This is the first year when 6 monthly terms have been agreed between miners and smelters. Terms for the normal mid year contracts which actually cover shipments over 12 month period have not yet been settled and they will be critical in understanding to what extent the H2 terms are a blip within the underlying trend.

There is a strong case for thinking so. The global copper concentrates market has been thrown out of kilter by the earthquake and tsunami in Japan in the middle of March.

Three Japanese smelters were forced to close in the immediate aftermath. The largest one, the Onahama plant with annual capacity of 258,000 tonnes is still out of action. It will remain shut until July which is why majority owner Mitsubishi Materials is forecasting 22% slump in copper output in the 6 months to September of this year.

Onahama declared force majeure on contracted copper concentrates, forcing miners to find an alternative home for the affected tonnage. Spot terms spiked to over USD 100 and 10.0 cents as a result with Chinese smelters the main beneficiaries. That movement in the spot price, resulting from an unforeseen one off event, is the all important context in which to see the H2 settlement.

Certainly, there is little to suggest that concentrates availability will be anything other than tight once the Japan effect fades. Global production of copper concentrates remained highly constrained in the first part of this year. Output from the 11 largest publicly listed copper miners slumped 8% in Q1 2011 relative to Q4 2010.

The International Copper Study Group's latest monthly bulletin showed that mine capacity utilization sinking yet further to 76.5% in the first two months of this year from 84% in the previous quarter. By historical standards this is an extremely low figure. Utilization rates were above 90% in the years prior to 2006.

The long term problem for copper smelters competing for custom concentrates is that there is simply too much capacity chasing too little supply. This is first and foremost a Chinese phenomenon. The ICSG forecasts China will account for 58% of global growth in smelter capacity in the 2010 to 2014 period.

The ICSG said that and even though smelter capacity growth is expected to lag mine capacity growth, the result will simply be an improvement in utilization rates from last year's low 82%. Smelter capacity should be sufficient to accommodate the growth in concentrate production. This dynamic explains why Xstrata has just decided to accelerate the closure of its Mt Isa smelter and Townsville refinery in Queensland, Australia.

Both plants will now cease operating in 2016 and will be dismantled, the company announced earlier this month. There are specific factors at work here. Although integrated with Xstrata's Queensland copper mining operations the smelter is actually located some 1,000 kilometers away from the Townsville refinery on the coast adding to costs.

Nor do the Mt Isa and Ernest Henry mines supply enough raw materials to keep the smelter fully utilized. The problem will become more acute as mining at Ernest Henry shifts underground with a resulting drop in annual output from this year onwards. Production of copper in concentrate will slide to around 50,000 tonnes per year from last year's 75,000 tonnes.

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