low tc rc could lead to cu shortage h2

TC/RC CHARGES SLUMP
Low copper refining fees could boost Chinese imports in 2H 2008

TIGHT COPPER ORE SUPPLIES ARE FORCING SMELTERS TO CUT TC/RCs TO UNECONOMIC LEVELS, WHICH COULD LEAD TO A SHORTAGE OF REFINED METAL AND HIGHER PRICES by the second half of 2008.

Singapore/HongKong (Reuters), by Nick Trevethan and Polly Yam (April 30, 2008)


China's refined copper imports could surge in the third quarter of the year, potentially boosting prices to record levels, if sliding global smelting margins trigger domestic production cuts.

! Copper smelters around the world are being forced to cut the fees they charge to convert concentrate into metals as they compete for scarce supplies of ore. Some are considering reducing production rather than operating at a loss, analysts say.

-----------------------------------------------

'ZERO FEES'

Last week, Spain's Atlantic Copper, part of miner Freeport-McMoRan Copper & Gold Inc., said some spot market fees to refine concentrate into metal had been settled at zero, suggesting very tight supplies.

Chinese copper smelters are still receiving copper production fees, known as treatment and refining charges, or TC/RCs, with recent deals at $35-$40 a tonne for smelting imported concentrate into copper anode and 3.5-4.0 cents a pound to turn anode into refined metal, smelter officials and traders said.

But they have fallen from around $45-$50 and 4.5-5.0 cents at the start of the year, and could be set for more losses.

----------------------------------------------------

CUT BACK

"If fees fall to a certain level, smelters will cut back," Gayle Berry, an analyst at Barclays Capital, said.

"We are seeing that in lead in China already, where they are not increasing utilisation rates even though they have capacity, because it's just not profitable," she said.

If the pattern seen in lead is repeated in copper, then Chinese copper smelters are likely to buy cheaper scrap and may consider cutting production in the fourth quarter.

"If we are not satisfied with the price, we will not buy," said a senior executive at Jiangxi Copper, China's top integrated copper producer.

! Berry said BarCap is forecasting copper prices to peak in the third quarter of the year at an average of $8,300 a tonne; prices now are $8,545.

-----------------------------------------

NOT A DEAD LOSS - MONEY COMES FROM FUTURES

The Jiangxi Copper executive said the 'zero fees' did not necessarily mean the smelters were working for nothing.

! By extending the payment terms or quotational period to six months, smelters can make money by selling cash metal which is trading at a premium, and setting the buying prices for concentrate based on copper futures, which are cheaper.

A trader at an international trading house said a buyer could still achieve actual TC/RCs of $30 and 3 cents if given a six-month quotational period, based on last Friday's copper prices on the London Metal Exchange.

But zero fees would still leave miners in a strong bargaining position in negotiations for mid-year and annual term contracts, which kick off in July.

He said that as a broad rule, supply tightness was usually more evident in Asia, where demand is growing rapidly, than in Europe.

Currently, copper prices in China -- including its value-added tax -- are trading well below those on the international market, rubbing further salt into smelters' wounds as smelters import concentrate based on world metal prices and sell metal at home.

"When flour is more expensive than bread, who is going to produce? Lower Chinese copper prices are more important than TC/RCs when smelters consider output cuts," a trader at a Western trading firm said.

That has led to consumers drawing on domestic stockpiles, but Berry said those supplies were becoming stretched, raising the risk of price spikes in the second half.

"As we move into the second half of the year, people are going to be operating with extremely low stocks, and at the same time, refineries are going to be operating at potentially lower levels because of even lower TC/RCs," Berry said.

"So you are going to have this potent mix of less domestic supply because of reduced operating rates combined with a pick-up in demand from semi-fabricators."

Berry was unable to give a forecast of how much China might need to import in the second half, but said BarCap expects China's annual imports of refined copper to rise 9.5 percent to 1.5 million tonnes in 2008.

China's refined copper in the first three months of the year stood at 378,823 tonnes, but imports in March slowed and that trend is expected to continue in April and into May, leaving room for a sharp upturn in demand and prices in the third quarter. ($1=6.9885 yuan) (Editing by Ben Tan and Jonathan Leff)


http://www.mineweb.net/mineweb/view/mineweb/en/page36?oid=51996&sn=Detail