BHP May Win Copper Fee Cut From Smelters to Lowest in 37 Years

July 2 （Bloomberg） -- BHP Billiton Ltd., the world’s largest mining company, may win a reduction in mid-year copper processing fees amid tight raw material supplies, possibly driving them to the lowest level in 37 years.

BHP and LS-Nikko Copper Inc. settled the fees at $39 a metric ton for smelting and 3.9 cents a pound for refining for the contract year that begins July 1, research company Brook Hunt said in a report to clients this week. LS-Nikko spokesman Lee Joon denied an agreement had been reached. Fiona Martin, spokeswoman for BHP in Melbourne, declined to comment.

Processing fees have slumped in the past two years because lower ore grades and rapid expansion of smelting capacity in China cut raw material supplies. The so-called treatment and refining charges usually drop when there is a shortage of raw material and smelters have to compete for deliveries.

“Conditions are getting worse for smelters,” said Takashi Murata, an analyst at Daiwa Securities Capital Markets Co. in Tokyo. “The mid-year contracts are not that significant, but the number will set a direction for upcoming talks for the most important calendar 2011 deals.”

An agreement at $39 a ton and 3.9 cents a pound would be the lowest level since 1973, according to data compiled by Hirosuke Chihara, a researcher at state-run Metal Economics Research Institute of Japan. That compares with $46.50 a ton and 4.65 cents for calendar 2010 fees. A year ago, Japanese smelters and BHP settled mid-year fees at $50 and 5 cents.

‘Supply Constrained’

Miners and smelters set annual processing fees twice a year, with the July contracts covering about 10 percent of annual volumes processed in Japan. Copper smelters buy concentrate, a semi-processed form of ore used as a feedstock, at a price based on the London Metal Exchange benchmark minus processing fees. BHP owns the Escondida mine, the world’s biggest copper mine.

“Copper concentrate supply remains constrained,” Atsushi Yamaguchi, a Tokyo-based analyst at UBS AG, wrote in a report on June 11. “In any case, procurement based on mid-year talks is relatively small at all the companies and so any negative impact on earnings is likely to be minimal.”

Three-month delivery copper rose as much as 2.2 percent to $6,466 a metric ton on the London Metal Exchange, and traded at $6,455 at 12:55 p.m. in Tokyo. The contract has lost almost 5 percent this week.

The availability of copper concentrate to feed global smelters has been “very low over the past few years” with smelters struggling to “survive,” Chief Executive Officer Bernd Drouven of Aurubis AG, the biggest copper refiner in Europe, said June 7.

Shortfall

The copper concentrate market will have a shortage for three years after mining companies delayed projects because of lower prices, according to Javier Targhetta, Freeport-McMoRan Copper & Gold Inc’s senior vice president of marketing and sales. The deficit will be between 500,000 tons and 1 million tons this year, Targhetta said June 6.

LS-Nikko, operator of the world’s third-largest copper refinery and smelter, is a joint venture between South Korea’s LS Corp. and a Japanese group led by Nippon Mining & Metals Co.

Pan Pacific Copper Co., Sumitomo Metal Mining Co. and Mitsubishi Materials Corp., the country’s top three producers of the metal, have not reached any deal with BHP, according to spokesmen Kan Komatsuzaki, Masashi Takahashi and Hisato Matsubara.

Pan Pacific is 66 percent owned by Nippon Mining & Metals Co., a unit of Nippon Mining Holdings Inc. Mitsui Mining & Smelting Co. holds the remaining share.