Domestic copper smelters to gain from falling rupee

In a significant boost to Indian copper smelters, treatment and refining charges (Tc/Rc) are settled 12.4 per cent higher for the next year. Domestic copper producers, including Hindalco Industries and Sterlite Industries, are also expected to gain from the rupee depreciation, as all charges are settled in dollars.

The leading Chinese smelters Jiangxi Copper Corp and Freeport-McMoran Copper Gold, have agreed to raise Tc/Rc for 2012 to $63.5 a tonne and 6.35c/lb, respectively. This sets the benchmark for global copper smelters and mining companies. Tc/Rc are paid by mining companies to smelters for converting copper concentrate into refined copper products like cathode and bars.

“An increase in refining and treatment charges for copper will improve the top line of processing companies but it would be limited, as copper concentrate is largely imported in India,” said Pukhraj Sethiya, senior consultant, PwC.

In the mining sector, treatment and refining cost the most in extracting metal from ore. Treatment costs are those of the smelting process, which uses heat to melt metal to extract it mechanically from the ore. Refining costs are for use of the electro-refining processes, the output of which is metal pure enough to be sold for most purposes.

Public sector Hindustan Copper produces 20,000-30,000 tonnes of copper cathode and bars annually by excavating concentrate from domestic mines.

India’s annual copper production is estimated to be 680,000 tonnes, of which Hindalco Industries is 340,000 tonnes and Sterlite Industries 310,000 tonnes. Neither owns mines in India and are dependent on imported copper concentrates.

The financial performance of these two companies, therefore, largely depends upon the prevailing quality of ore in overseas mines and the rupee movement against the dollar. Debu Bhattacharya, managing director of Hindalco Industries, had recently raised concerns over falling ore quality globally.

“The 22 per cent fall in the rupee since August would certainly benefit these smelters in terms of higher realisation. But, the ongoing fiscal condition in the country remains a major concern for the overall demand. There are apprehensions that copper demand may continue to remain under pressure in coming months due to unfavourable economic conditions,” said Bikash Bhalotia, an analyst with PINC Research.

The quantum of concentrate import, however, depends upon the quality of ore and copper content in it.

Industrial activity has witnessed a decline in the second quarter of the current financial year, which signals a slowdown in economic activity. Against the earlier estimate of a recovery in consumption in the second half of the current financial year, demand continued to remain under pressure.

“The trend is likely to continue until the second half of the next calendar year. Even if adequate measures are taken to support the growth in industry activity, there is hardly any possibility of their actual impact until June 2012,” said Reena Walia, senior research analyst with Angel Broking.