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Column: COVID-19 mine disruption causes copper concentrates crunch

LONDON (Reuters) - The copper market has been on a tear over the last couple of weeks, with the London price hitting a 29-month high on Monday.

Workers monitor a process inside a plant at the copper smelter of Codelco Ventanas in Ventanas city, Chile, February 15, 2012. REUTERS/Rodrigo Garrido

At a current $7,120 per tonne, London Metal Exchange three-month copper is now up by 15% on the start of 2020 and by 63% from the March lows.

The latest leg of this remarkable rally has been fuelled by expectations of economic recovery from the pandemic in the form of Joe Biden’s win in the U.S. Presidential election (to be confirmed) and COVID-19 vaccine breakthroughs (also to be confirmed).

But copper’s fundamental dynamics are also playing their part in the bullish momentum.

A wave of mine lockdowns earlier this year has caught up with the market in the form of a concentrates crunch as smelters struggle to find raw material.

CONCENTRATES CRUNCH

Smelter treatment and refining charges (TCRCs) are the best indicator of what’s going on in the opaque concentrates segment of the copper supply chain.

Smelters increase their charges when there is good availability and lower them in times of shortfall.

And right now spot treatment charges in China, the world’s largest processor of raw material into refined metal, are at eight-year lows around $50 per tonne (TC) and 5 cents per lb (RC).

These are likely “must-have” purchases by smaller operators, quite possibly reflecting the diversion of cargoes due to an unofficial ban on imports from Australia.

China’s biggest smelters, grouped under the guise of the China Smelter Purchase Team (CSPT), agreed a floor price of $58 and 5.8 cents for fourth-quarter purchases.

That was up 9% on the third-quarter floor price as the CSPT positions itself for talks with miners on benchmark terms for next year’s deliveries.

But these are extremely low levels by any historical standard and a sign that too much smelter capacity, particularly in China, is chasing too little mined concentrates.

The CSPT’s fourth-quarter floor price is still below this year’s benchmark terms of $62 and 6.2 cents, which were themselves the lowest annual settlement since 2011.

MINE CRUNCH

Smelters are now paying the price for production lost during the first wave of lockdowns and quarantines in the second quarter of the year.

Other metals such as zinc may have been hit harder, but the loss of copper supply has still been significant.

The International Copper Study Group (ICSG) forecast global copper mine production would rise by 2.0% over the course of 2020 at its meeting in October 2019.

Fast forward to October this year and the Group now expects mine production to fall by 1.5% in 2020. The 700,000-tonne turnaround in forecast “is principally a consequence of the COVID-19 related lockdowns that resulted in temporary mine closures or reduced production levels in many countries, most notably Peru,” the ICSG said.

This year will be the second consecutive year of contracting copper mine production after a 0.2% decline in 2019, according to the Study Group.

That’s particularly tough for those Chinese operators that have brought on new smelting capacity in expectations of a much looser raw materials market.

Chinese imports of copper concentrates were up by 2.3% in the first nine months of this year, the lowest rate of increase since 2017 and, judging by the current squeeze on smelter margins, insufficient to meet the country’s expanding demand.

RELIEF IN 2021?

In theory the world’s copper mines should be fully recovered by the end of this year.

The ICSG is forecasting a 4.6% surge in 2021 output as this year’s production constraints disappear.

But this being the copper market, where disruption is hard-wired into the supply picture, such expectations may be on the optimistic side.

Moreover, there may yet be a long-COVID effect in the form of deferred operating and capital expenditure in the mining sector.

That warning came from Vanessa Davidson, head of copper at CRU, speaking at the research company’s LME Week “Virtual Breakfast” in October.

Capital spend in the copper mine sector is running significantly below even the reduced levels seen after the Global Financial Crisis, Davidson noted.

Forecasts for copper mine supply are always hazardous but particularly so this year.

BULLISH BENCHMARK

Chinese smelters will certainly be hoping for some relief from improved mine performance in 2021.

But the current squeeze on spot concentrates availability gives them little leverage in talks with miners on next year’s benchmark treatment terms.

Even matching this year’s low terms may be a challenge with analysts expecting another slight drop to the $60 and 6 cents level.

That would mark another year of financial pain for smelters but the implied extension of the current smelter bottleneck would be a bullish price signal.

Chinese copper demand is booming as the country stages a speedy recovery from the early-year lockdowns and the government injects another generous dose of construction and infrastructure stimulus.

China’s smelters are struggling to meet that demand due to a shortage of raw material. That in turn translates into higher demand for imports of refined metal, removing surplus from the rest of the world.

This dynamic has a way to run yet.

Even if current spot terms are over-stating the scale of the concentrates squeeze, the low-ball expectations for next year’s benchmark terms tell you the world’s copper mines are still playing COVID-19 catch-up.

The opinions expressed here are those of the author, a columnist for Reuters.

Editing by Kirsten Donovan

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