Commodities | Jun 05 2006
By Greg Peel
SB Citigroup suggests the big copper miners are currently in a strong bargaining position with respect to the next round of 6-monthly contract treatment and refining charges (TC/RC) negotiation with the smelters. Smelter concentrate stocks have declined and supply has been disrupted by operational difficulties and strike action.
For various reasons, stoppages have occurred recently in Mexico, Zambia, Indonesia and Chile. As these mines are struggling to perform, Citigroup notes BHP Billiton (BHP) has taken the opportunity to push for a change in TC/RC charges.
Under a longstanding arrangement, copper smelters have enjoyed a "price participation" (PP) element to their charge of 10% of the difference between US90c/lb and the prevailing spot price. As the spot price is currently around US$3.50/lb, the smelters have been enjoying a windfall that sees the PP component more valuable than the TC/RC charge itself.
Citigroup notes the PP component can be higher than the charges themselves.
Contract charges were reduced by 16% at the start of the year, but the spot TC/RC charge has fallen to US7.7c/lb or less, Citigroup reports. BHP doesn’t believe further contact reductions will be acceptable to the smelters, so it’s proposing changes to the way the windfall PP is calculated: abolish it, cap it, or raise the US90c/lb level.
Citigroup believes the PP will stay, but feels the smelters will likely have to accept some rise in the level as acknowledgement that costs across the industry have increased significantly.