Three-month copper futures on the London Metal Exchange reached $ 10,720 a tonne in May amid disruption from the Covid-19 pandemic and political tensions affecting the supply of materials to mines.

Processing and Refining (TC / CR) costs are the costs of processing ores and concentrates into refined metals – a key source of revenue for smelters. When the demand for copper is high but the supply of raw materials from the mines is reduced, smelters reduce their costs to secure the supply.

Supply chains have been particularly disrupted over the past year after the coronavirus pandemic curtailed mining activity in key regions of the world, supply chains have been disrupted, and political clashes cut off some key trade routes.

While TC / CR are at their lowest for a decade, smelters are wondering if they can maintain production, which is helping to push copper prices to record highs.

Fastmarkets wishes to provide a better understanding of this key area of ​​the market. In April, we introduced smelter and dealer purchase factors based on our copper concentrates benchmark. Our index showed that over the past year market conditions have driven fees down.

Processing and refining costs plummet

In early April 2021, the Fastmarkets Copper Concentrate Index showed trading was at its lowest level since 2013, falling 61% year-over-year.

This contrasts with prices at the start of April 2020, after the Covid-19 pandemic created uncertainty around future demand. So, while prices were at their highest level in a year, concentrate holders reduced their long positions and sold equipment to smelters.

Limited offer

The decline in TC / RC reflects a lack of mined copper supply available in the spot market. Chinese imports of copper concentrate fell 1.9% year on year to 21.76 million tonnes in 2020, the first drop in imports since 2011.

This was in part due to a disconnect between demand in China and mining supply elsewhere in 2020. Strict lockdowns allowed China to recover quickly from the pandemic last year, but key producers such as Chile and Peru continue to be affected, even in 2021.

Rising trade tensions between China and Australia have also further exacerbated this supply gap.

At the end of October 2020, Chinese smelters and traders were verbally ordered to stop purchasing equipment – including coking coal and copper – from Australia. In 2019, Australian copper accounted for 5% of China’s copper imports, the fifth largest supplier behind Chile, Peru, Mongolia and Mexico.

Chinese foundries have already faced hurdles when importing materials from the United States since 2018, as the materials are subject to import taxes under Donald Trump’s order under section 232.

Demand is increasing

Chinese copper smelters have grown aggressively over the past decade, which has led to extreme competition for copper concentrate overseas and placed the industry in a fragile supply position, according to Fastmarkets.

In 2019, China’s copper capacity reached 12.59 million tonnes per year, but the utilization rate was only 77%, an executive said at the “ two-session ” meetings of the Chinese People’s Political Consultative Conference and the National People’s Congress.

This is a threefold increase from the country’s copper production level a decade ago, which, according to official Chinese customs data, stood at 4.1 million tonnes in 2009.

Despite existing unused capacity, China has continued to build new copper smelting facilities, and in 2021, refined copper capacity is expected to reach 14.22 million tonnes. This, in turn, would suggest that there is a growing appetite for copper-based raw materials.

Talking about cuts could drive up prices
On May 10, the purchasing team of the China Copper Smelter (CSPT) – a group of 15 state-owned smelters – agreed to cut production by 300,000 tonnes.

The production cut order follows the low TC / RC received for cash purchases, as these low fees make processing metal concentrates unprofitable, sources said.

“Chinese smelters are acting in response to the current tight market for copper concentrates,” a market source said.

“When you have tight concentration conditions, it spills over into the refined market and, therefore, into prices,” said Boris Mikanikrezai, copper analyst at Fastmarkets. “There is a strong relationship between the price and the index for copper concentrates, the strongest of which has a 12-month lag. [low TC/RCs] are clearly bullish on the price of copper over the long term. “

Fastmarkets research expects low TC / RCs to be low for the next few months and low TC / RCs to affect foundry margins, which may mean further production cuts for foundries despite growing demand. . This will therefore continue to support high copper prices.