Trade Review: Copper TC/RCs seen rising in Q2 as supply eases

This report is part of the S&P Global Commodity Insights' Metals Trade Review series, where we dig through datasets and digest some of the key trends in copper, iron ore, alumina, steel and scrap, and metallurgical coal. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

Treatment charges for spot copper concentrate in China could continue to rise in the second quarter amid easing supply and as smelters in China show a stronger preference for super clean concentrates in the spot market, market participants said.

Supply of complex copper concentrates -- which have high levels of impurities like arsenic and fluorine -- increased in Q1 due to production boosts at Indonesia's Grasberg and Serbia's Timok mines.

These concentrates need to blended with other concentrates to lower deleterious content in order to meet import regulations by Chinese customs -- and as a result of the increase in complex concentrate supply, have seen greater availability in the market.

Offers for clean concentrate also increased in the spot market in Q1 due to unexpected maintenance at major Chinese smelter Yanggu Xiangguang Copper in March.

The S&P Global Commodity Insights daily clean copper concentrate treatment charge reached a one-year high March 31 of $79.20/mt CIF China -- up 33% from Dec. 31, 2021 -- and is expected to continue rising into Q2 as supply eases. A higher TC translates into a lower price for the concentrate.

A road blockade at the Las Bambas mine in Peru was lifted in March, and production at Ivanhoe Mine's Kamoa-Kakula site in the Democratic Republic of Congo is scheduled to ramp up in Q2. Meanwhile, shipments initially bound for Yanggu Xiangguang will be diverted into the spot market instead.

Smelters were more intent than traders to conclude purchases in the spot market in Q1, as the spread between what the two groups of buyers were willing to pay narrowed.

Traders typically pay a lower TC than smelters, but have been more reluctant to take on physical positions since early Q1 amid an increasing number of prompt shipments and a rising TC.

As the Clean Copper Concentrate Producer-Trader TC differential sank to minus $1.60/mt on March 24 -- the lowest since the assessment was launched on Dec. 1, 2021 -- producers showed greater preference in selling directly to smelters instead.

Logistical disruptions both within and outside of China have led to a rise in in-transit concentrate inventories, although this has not dampened smelter demand for material in the short term.

Shipment delays from Las Bambas in Peru and Escondida in Chile, as well as labor shortages impacting the loading of US material, posed challenges in Q1. These were exacerbated by stringent pandemic controls upon arrival in China, which caused waiting periods for discharging at ports along the Yangtze River to be extended by 3-5 days on top of the usual 10 days before customs clearance.

"[The measures] led to higher-than-usual in-transit inventory levels, which smelters were not able to immediately use," a source at a smelter in eastern China said, explaining their continued buying of spot material despite being well-stocked.

Meanwhile, Indonesian supply to southeastern Europe via the Black Sea has been disrupted by Russia's invasion of Ukraine, and market participants expect the material to be diverted to Asian consumers if the conflict dragged on, tipping the scales toward greater supply.

Take our poll: Do you think treatment charges for spot #copper concentrate in #China will rise in Q2?

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Demand rises for super clean concentrate

Amid the greater availability of blended concentrates and rising copper and gold prices, smelters have also shown a greater preference for clean concentrates with gold content lower than 1 gram and copper content of 22%-25%.

"Considering the cost of removing impurities and the difficulties in blending when buying non-standard concentrates, it makes greater sense to just buy clean concentrates," a second smelter in eastern China said.

As an indication of how the market's preference for clean concentrates has impacted price, the spread between clean material and Antamina B, which has high bismuth and zinc, widened to a $10/mt TC in March from $5/mt TC in January.

Outlook mixed for imported cathode premiums

Opposing forces are expected to cloud the outlook for currently elevated copper cathode prices, including lower Chinese domestic output and weaker demand due to pandemic measures in pursuit of what the Chinese government has called a dynamic Covid Zero strategy.

On one hand, cathode supply has tightened in China as Yanggu Xiangguang has stopped production and Chinese smelters started to export cathodes.

On the other, coronavirus outbreaks across parts of China have caused transportation costs to rise and dampened cathode demand and transaction volumes.

In addition, many Chinese traders have shied away from buying Russian cathode using the dollar even as China has not imposed sanctions against Russian entities, as Chinese banks have complied with Western sanctions and have not been issuing dollar-denominated letters of credit for Russian material.

While Western sanctions have so far left Russian cathode untouched – targeting mainly Russian banks and other commodities – those transacted in Chinese yuan have been observed without discounts.

Inflows of Russian cathodes to China in February and a slow recovery of premiums for imports after the Lunar New Year have put pressure on premiums, as has tepid demand from the construction sector, slower manufacturing during the Winter Olympics and pandemic controls across China.

The domestic glut has caused Chinese copper prices to lag the overseas market, and import losses widened to a record Yuan 3,000/mt ($470/mt) March 4 as three-month copper prices on the LME soared past $10,500/mt.

Chinese copper cathode import premiums were assessed at $20/mt March 7, the lowest since June 21, 2021.

Record high losses on paper have driven traders to divert incoming shipments into bonded warehouses, where goods can be exported to LME warehouses or sold in the domestic market later when prices improve.