London 25/01/2016 - Freeport-McMoRan will be a bigger user of the spot market for the sale of copper concentrates this year after its treatment and refining charge (TC/RC) benchmark settlement included a cut in volumes sold under annual terms, FastMarkets understands.
After nearly four months of negotiations, the US miner agreed on Friday with China's biggest smelter, Jiangxi Copper, to cut the annual TC/RC by nine percent to $97.35 per tonne/9.735 cents per pound for 2016 - the first reduction in the annual benchmark in six years.
The agreement, which is in line with a deal reached in mid-December by Chilean miner Antofagasta, is the result of a compromise where Freeport stopped pushing for even lower terms in exchange for a reduction in contractual volumes of up to 20 percent, industry sources said.
"The settlement is for the clean concentrate benchmark with no side-term discussions except for some contractual tonnage reduction," a source close to the negotiations said, while another confirmed the deal included a "significant cut in tonnages".
The benchmark is down from $107/10.7 cents in 2015 but above spot terms, which are currently at $83-93/8.3-9.3 cents, according to FastMarkets' latest assesment on Friday.
"Under this scenario, $97.35 is a high TC but it preserves the Freeport-Jiangxi benchmark and Freeport got the option to reduce the contractual tonnage to sell it on the spot and take advantage of the present market situation," a third source explained. "Some traders are offering TC/RCs below $80/8 cents now."
Freeport is believed to have agreed the same terms with other Chinese smelters while offering similar arrangements to other customers in Japan, South Korea and India.
Although some miners such as Codelco and Anglo American had already started booking annual contracts based on the Antofagasta number, others had been waiting for Freeport's settlement. So more spot transactions are expected before the Chinese New Year starts on February 8, while Freeport will probably also sell more on the spot via tenders or bilateral agreements.
The US miner usually sells around one million tonnes per year of concentrates to Chinese smelters including Jiangxi Copper, Jinchuan, Tongling and Xiangguang. This represents a quarter of Freeport's total concentrates sales of an estimated four million tonnes per year, FastMarkets understands.
Freeport produces around six million tonnes of concentrates per year - out of global output of more than 17 million tonnes - from mines in Indonesia (Grasberg), South America (Cerro Verde) and North America (mainly Morenci) but consumes two million tonnes for its own smelters in Spain (Huelva), Indonesia (Gresik) and the US (Miami).
With LME copper prices - currently at $4,450 per tonne - holding close to six-year lows, many miners including Freeport have announced production cuts, starting with their high-cost facilities.
Freeport pledged mine cuts of 158,758 tonnes in 2016, for instance, while Glencore and Anglo American also made reductions. In total, cuts and closures by around 28 mines so far have removed some 450,000 tonnes of copper in concentrate from the market, according to estimates from Macquarie.
But there are indications that the supply of concentrates will steadily increase over the coming year - MMG's new Las Bambas copper mine in Peru made its first shipment of around 10,000 tonnes of copper concentrates to Jiangxi Copper last week, while Freeport is also producing more at Cerro Verde in Peru and better ore grades are coming from Grasberg.
As well, the ramp-up of production continues at several newer operations including Caserones, Toromocho, Constantia and Sentinel.
Still, spot TC/RCs may continue to fall or remain at low levels in the first half of the year while smelters rebuild stocks and miners keep supply discipline a priority amid low prices.
The 2016 TC/RC benchmark "is a fair deal but we see short-term downside risks for the spot terms of these processing fees", Morgan Stanley said in a note on Monday.
"Given copper's persistently low prices, spot TC/RCs of $85/8.5 cents carry downside risk in China's seasonally active first half. And there's even more downside risk for these processing fees in 2016 if the miners cut output further," the bank added.
(Editing by Mark Shaw)