India’s Copper industry major and Anil Agrawal controlled Vedanta group company's Sterlite Copper is not worried despite the fact that copper prices are on a downward trail. Copper prices are 15% lower year-on-year but the refining charges it receives are going up and are expected to move further higher, which will improve the company’s margins.
Refining charges also known as Tc/Rc (treatment and refining charges) have been negotiated at 16.33 c/lb for the calender year, and keeping the rise in spot Tc/Rc charges in mind, these charges are likely to improve from here on for Sterlite Copper, India’s largest copper refining company.
With demand for finished copper falling, several copper smelters have cut capacities in last few months. On the other side mines have started mining more copper concentrates to generate cash. As a result refining charges have started moving up, due to a demand-supply gap.
In India no smelters have cut capacities and Sterlite being major among them stands to gain the most.
"Sterlite Copper is ramping up production volumes of refined copper to beat the general slowdown. In light of this, and the rupee depreciation, Sterlite copper expects much better results going forward," informed P Ramnath, CEO of Sterlite Copper.
Tc/Rc charges are mainly a function of concentrate supply.
In 2011 and early 2012, copper supply was staggering due to mining strikes and cut in production owing to the overall meltdown. However, mining companies are now ramping up their capacity.
Major mines like Codelco, Escondida, Esperenza have been have been increasing their mining capacities for the past couple of years and new mines are expected to be commissioned soon, taking supply concerns lower, the Third Quarter Metals Review report from Naxitis Global Asset Management noted.
This would push Tc/Rc charges for the quarter much higher, marketmen believe.
On the other hand, despite certain smelters cutting production, Indian companies have retained their volumes. In fact, Sterlite’s copper cathode volumes increased to 88,000 tonne in Q1 2012, up 19% from 74,000 tonne in the same quarter in 2011.
"The company is in a good position to benefit from rising Tc/Rc charges if their volumes continue to grow and there is no major shock from the global market,” Kamlesh Kotak, head, equity research, Asian Markets Securities, said. "Their margins in the previous quarter were better than market expectations," he said. Sterlite Copper’s has a market share of 48% in the refined copper market in India.
The Way Ahead
Robust increase in mining supply and apparent demand from China is likely to push Tc/Rc charges higher in the next year.
The Indian government has also allotted one trillion dollars to power and infrastructure spending in the next five year plan 2012-17. The industry is likely to see a double digit growth in domestic copper demand, industry experts say, pushing Tc/Rc charges higher by 20-25%.