Copper smelters suffer due to low refining rates

Revival in China’s economy, as signaled by Purchasing Managers’ Index (PMI), has further pushed up metal prices, especially copper. Copper prices have hit the 6 per cent upper limit on the Shanghai exchange as per PMI data. In the last 4 months, copper prices have gone up by nearly 60 per cent from its multi-year lows. At the end of December 2008, copper touched a low of $2,812 a tonne. On May 1, it traded at $4,501 on the London Metal Exchange (LME).

The increase in copper prices has actually resulted in miners paying lower treatment and refining charges (TC/FC) to copper smelters. Most of the copper smelters depend on spot TC/FC as they enter into long- term contracts with miners for less than half of their smelting capacities. TC/FC charges are also said to have fallen by half compared to contracted charges at the beginning of the year. Indian companies Sterlite and Birla group’s Hindustan Copper have been affected due to this, said an industry analyst.

Copper prices dropped more than 15 per cent from a six-month high in mid-April but recovered by Friday when LME copper hit a two-week high and zinc rose 6 per cent, boosted by an improvement in the US consumer confidence in April, an expansion in Chinese manufacturing and another hefty outflow of metal from LME warehouses. Most of the stock outflow was from Asian warehouses, said the industry source.

Shanghai copper today hit the 6 per cent limit on Monday, when the market reopened after a one-day break, chasing a rally in London following positive economic data from China and the US. The Shanghai benchmark copper jumped by 2,160 yuan to 38,180 yuan, its upside threshold in early trade. LME was closed on account of holidays.

PMI, an index-based survey of industry executives, conducted for Hong Kong-based brokerage CLSA, rose for the first time in 9 months and now is at a nine-month high of 50.1 in April from 44.8 in March.

Buying in copper was triggered by China’s State Reserve Bureau (SRB) to build strategic reserves of metals as most metals were available quite cheap and some were at their multi-decade lows.

Most of this buying was in anticipation that the recessionary trend was moderating and various stimulus packages would lead to recovery in economy. Chinese manufacturing index revival is seen as the first sign of actual recovery taking place.

An analyst with a risk management firm tracking global commodities said that “most of the rise in copper prices was in anticipation of demand and the red metal was available at a much lower price. Although there is some sign of actual demand going up, the real recovery in prices would be seen once clearer signals are seen about economic recovery.”

A Barclays’ commodities analyst said “China faces huge shortage of copper scrap and hence its buying for cathodes- (copper product) will go up.”

Shortage in China has also resulted in higher prices on Shanghai exchange compared to the London Metal Exchange (LME). This has created arbitrage opportunities and smelters were buying concentrates from LME and were selling in Shanghai after smelting them. Such arbitrage also leads to increase in copper prices.

China which has foreign exchange reserves of over a trillion dollars is now, in search for an alternate global currency and is said to be diverting some part of that for buying metals for strategic reserves. China’s SRB keeps on building reserves and it trades in commodities also. However, China has already declared that its gold reserves more than doubled in last five years to 1,054 tones.