Reporting by Vicky Chen and Kiki Kang
London 26/10/2016 - Negotiations for benchmark treatment charges and refining charges (TC/RCs) for annual copper concentrate supply in 2017 will start during LME Week, with a settlement widely expected at around $95-102 per tonne/9.5-10.2 cents per pound - either side of this year's level.
The 2016 benchmark for TC/RCs, the discounts on the copper price paid to smelters for the cost of processing concentrate into metal, was settled at $97.35/9.735 cents between Jiangxi Copper and Antofagasta.
Chinese copper smelters are widely expected to offer three-digit TC/RCs to US miners, believing that mine supply will exceed growth in smelter capacity in 2017.
"The expansion of several major mines in South America has more than offset the increase of smelting capacity in China. We think a three-digit figure is fair," a member of the Chinese Smelters Purchase Team (CSPT) said.
The fourth-quarter price floor of $105/10.5 cents set by CSPT late in September is also an indicator of smelter expectations about the annual benchmark.
Spot TC/RCs were lower earlier in 2016 before new mining capacity came on-stream mainly around mid-year, a second smelting source said.
While the spread between miner offers and smelter bids is usually around $40 at the start of talks, it will be narrower this year and the negotiation process is likely to be shorter, according to speculation.
The difference between smelter/miner and trader/miner deals has also narrowed to $6-7 from $14-15 in March, according to historical data.
The Metal Bulletin copper concentrate index averaged $94.7/9.47 cents during the first nine months of this year, bottoming out in March at $82.4/8.24 cents and peaking at $103.4/10.34 cents in mid-July.
Miners, though, believe TC/RCs are capped close to current levels, claiming that production increases have peaked this year, more smelter projects will come online in 2017 and the abnormal infrequency of mining disruptions will not be repeated in 2017.
According to Metal Bulletin calculations, global smelting capacity will climb by around 500,000 tonnes per year (tpy) in 2017, including two new 100,000 tpy projects in Zhejiang and Qinghai, while some existing projects will ramp up output.
While most smelters expect a higher processing fee, many doubt it will exceed the 2015 settlement of $107/10.7 cents.
"2015 was maybe a bit too high… 2015 and 2016 could have been on the same level," a smelter source in Europe said. [Above] $100/10 cents would have been a good level for both years… I see no argument why it shouldn't be the same for 2017 - a little higher could be possible."
A major Chinese smelter described a settlement above $105/10.5 cents as "hardly likely", anticipating a softer market next year compared with the 2015 settlement.
On the spot market, TC/RCs on sales to smelters have trended higher since February this year, hitting a 2016 high of $102-106/10.2-10.6 late last month. Spot TC/RCs have averaged $93.9-99.6/9.39-9.96 cents in the year to date.
BENCHMARK LEADER - FREEPORT OR ANTOFAGASTA?
Late last year, Antofagasta and Jiangxi surprised the market by locking in TC/RCs first - Freeport followed suit a month later at the same level after talks with CSPT.
Antofagasta will follow its own path this year and has no reason to wait for others to agree first, a source close to the matter claimed.
"It's all about volume. One of the concerns for Freeport about following Antofagasta's lead last year was… whether the latter has big enough volume to represent the market," one concentrate trading source said.
One representative on each side usually heads annual discussions between miners and smelters; Freeport and Jiangxi typically take the leading roles.
But with availability of Freeport material scheduled to drop once its second smelter is built in Indonesia around 2017, absorbing all of the Grasberg mine's concentrate production, some have called for another miner such as Antofagasta to step up.
Antofagasta expects its copper production to be at the lower end of guidance of 710,000-740,000 tonnes it provided in January.
"It will be interesting to see who will settle first. I can imagine Antofagasta would not like to wait for Freeport's settlement," a smelter source said.
Freeport is also in talks with CSPT members on significant cuts to its annual copper concentrate supply contracts over the next two years. Some buyers have been offered a 50%-reduction plan for the coming year.
"For example, they want to [halve] copper concentrate supply to us. The first cut will be 20-30% in 2017 and then jump to 50% for 2018," a CSPT source said.
"Some smelters… will have the cuts in one go and with less significant tonnages," a source close to the matter said
If Chinese smelters agree to the cuts, annual supply tonnages into China will fall to 500,000 tonnes or below from around 1 million tonnes.
Freeport produces around 6 million tpy of concentrates - out of global output of more than 17 million tonnes - from mines in South America (Cerro Verde) and North America (mainly Morenci) as well as Grasberg but consumes 2 million tpy for its own smelters in Spain (Huelva), Indonesia (Gresik) and the US (Miami).
Freeport, which pledged mine output cuts of 158,758 tonnes in 2016, had been keen on securing a lower TC/RC benchmark than Antofagasta. But market participants believe it could struggle given the quality difference between Freeport's concentrate from Grasberg and Antofagasta's Pelambres material, which is higher in copper content and lower in gold.
(Additional reporting by Mark Burton, editing by Mark Shaw)