Smelters Win Higher 2011 Copper Fees; Challenging Outlook

SINGAPORE -（Dow Jones）- Copper smelters in Japan and China have won increased treatment and refining charges from global copper mining companies for 2011, smelters and traders said Monday.

The increase in fees is good news for smelters who had produced at below capacity in recent months, partly because they struggled to make profits at 2010 charge levels, which they considered excessively low.

Pan Pacific Copper, Japan's biggest copper smelter, confirmed it had agreed to treatment and refining charges of $80 per metric ton and 8 cents per pound with an unnamed South American miner for contracted shipments of copper concentrate in 2011.

This represents a 72% increase over the fees set in 2010.

However, any celebrations could be shortlived with China's burgeoning copper production likely to see the copper concentrate market tighten again in 2011.

"We strongly believe copper demand will be good and the concentrate market will tighten again this year. We don't have much confidence that the Japanese smelters will be able to maintain these levels in mid-year negotiations or in 2012," said Atsushi Yamaguchi, a non-ferrous metals analyst at UBS in Tokyo.

China's production of refined copper was 4,793,000 tons in 2010, up 12% from 2009, while capacity expansion of 500,000-600,000 tons in 2011 will likely contribute to a further rise in copper output, according to Beijing-based metals consultancy Antaike.

TC/RCs are paid by miners to smelters to turn copper concentrate into copper cathode. They are the key source of revenue for smelters, and tend to rise when concentrate availability is sufficient or smelters are producing at below capacity.

Traders in China said that a major Chinese smelter had agreed contracts with a North American copper mining company at $70/ton and 7 cents/lb, a 51% price hike over last year.

A concentrate trader at another Japanese smelter, who didn't wish to be named, said he had heard 2011 TC/RCs had been quoted as low as $56/ton and 5.6 cents/lb for some deals, with the confirmed PPC deal unlikely to be considered a benchmark.

The rise in fees for 2011 was mainly due to a spike in spot copper treatment and refining charges in China, said UBS's Yamaguchi.

"The smelters in China have cut back their concentrate purchases in recent months to maintain margins," he said.

Average spot copper TC/RCs in China had moved above $80/ton or 8 cents/lb by December, from $60/ton or 6 cents/lb in September, and $20/ton or 2 cents/lb in August.

This was partly due to London Metal Exchange copper prices trading at a premium to China's domestic prices reducing the incentive to import concentrate, which is usually sold based on the LME price.

In addition, near-record copper prices in recent months have made it more difficult to finance concentrate inventories, according to smelter executives.

Japanese smelters have also been producing at levels below capacity, partly as a result of low treatment fees in 2010, said Yamaguchi.

Nikkei reported that the four largest Japan copper producers plan to turn out a combined 673,920 tons of the red metal between October 2010 and March 2011, 10% below their combined capacity.

The strong Japanese yen, which appreciated 13% against the U.S. dollar in 2010, has also negatively impacted Japan's smelters as they are paid the fees in U.S. dollars but operating costs are in yen.

The long-term strategy of Japan's smelters to improve their competitive position is to increase their captive mine supply, which would allow them to benefit directly from higher copper prices.

Another Japanese smelter, Mitsubishi Materials （5711.TO）, also confirmed Monday it had agreed copper concentrate treatment contracts with Freeport McMoran Copper & Gold （FCX） and BHP Billiton （BHP）, but didn't discuss the charge level.