Indian copper smelters feel the pinch as China laps up key ingredient

Reduced concentrate output globally and heightened demand from Chinese smelters are to adversely affect the supply of feedstock for Indian smelters

The close to 1-million tonne (mt) Indian copper industry has three constituents, of which the biggest Hindalco has a 500,000-tonne smelter in Gujarat’s port city of Bharuch. Vedanta’s 400,000-tonne unit at Thoothukudi in Tamil Nadu has remained inoperative since March 2018 — first for plant maintenance and then the local government ordering its closure for causing damage to the environment. Of the three, the 76.05 per cent government-owned Hindustan Copper Limited (HCL) is alone vertically integrated from mining of ore to smelting to making value added continuous cast (CC) rods.

As Hindalco and Vedanta do not own mines in the country, their reliance on imports of metal in concentrate (MIC) for its smelting into refined copper is total. But this is quite a common global practice with Japan making around 1.5 mt of refined copper based on copper concentrate imports. China, which stepped up copper production by 8 per cent to 9.03 mt in 2018, made record imports of 19.72 mt of concentrate, up 13.7 per cent over 2017. When standalone smelters such as those belonging to Hindalco and Vedanta import MIC for smelting, they get treatment and refining charges (TC/RCs) from mining groups. TC/RC, negotiated between mines and the global smelting industry, is a discount given by mines for conversion of concentrate into refined copper. TC/RCs are, therefore, a principal source of revenue for smelters. Production of value added CC rods in the downstream, an area of strength for Hindalco is also an important revenue stream for smelters.

There is an established pattern to setting TC/RCs on an annual basis at negotiations, invariably intense, held between major miners and smelter owners during the LME week every October and also during Asia Copper week in November, the latter is more focussed on Chinese copper producers. While TC/RCs thus fixed are taken as benchmark for copper concentrate supply contracts for the whole of the following year, a number of factors such as availability of concentrate, which in turn depends on mines in operation in major copper ore producing countries such as Chile, Peru, Zambia and Indonesia and global smelter capacity in operation. Dynamics of TC/RCs are particularly in focus this year.

Spot TC/RCs for Asia Pacific are down to their lowest in at least six and a half years, squeezed by ramp-up of MIC consumption by smelters against a backdrop of tightening supply of the smelter feedstock. Worryingly for smelters, which find their margins already squeezed, spot TC/RCs look set to stay under pressure. At the current TC/RCs, there is a major climbdown from January’s $90-$94 a tonne. Hindalco Managing Director Satish Pai has said during a recent earnings conference call that copper concentrate market will likely see a deficit of around 100,000 tonne in 2019. This is to happen because of reduced production at several regions. Grasberg copper mine in which the Indonesian government had acquired 51 per cent ownership, previously majority-owned by Arizona-based Freeport-McMoran is having major production problems as the authorities have laid down rules for disposal of tailings, which are proving to be too difficult to honour.  

Grasberg, which is the world’s second largest copper mine and unarguably the most complex of all mines with its main pit being at 4 km above sea level is far from finding an economically feasible solution to tailings disposal. This big Indonesian mine apart, Chile’s Codelco, the world’s top copper miner, reported an 18 per cent year-on-year fall in its first quarter copper production. What could further tell on Codelco production are the unresolved industrial problems. Zambia is coming down hard on miners found to be in breach of environmental and financial regulations. According to Pai, the issues concerning mines in three continents and also the prospect of the “majority of smelters that experienced disruptions in 2018 being fully ramped up” are likely to lend “tightness to concentrate market in the second half of 2019.” The combination of “reduced concentrate output and heightened demand from Chinese smelters is likely to adversely affect TC/RC values at the spot level,” he says. When will the Vedanta smelter reopen remains anybody’s guess. But whenever operations start at Thoothukudi, there will be some extra pressure on TC/RCs, which move in tandem with concentrate supply situation and demand for smelter feedstock.

Not only are the majority of Chinese smelters back in business following their maintenance shutdowns but new smelting capacity of about 400,000 tonnes has been commissioned in the country that accounts for half the world’s copper use. A major concern for the industry is the likelihood of deceleration in global copper ore supply growth as operating mines contend with rising production costs resulting from systematic grade declines and resource depletion, says a DBS Asian Insights report. At the same time, low exploration in recent years is limiting new discoveries. DBS forecast is “global mine production will grow at a CAGR of 2.9 per cent” up to 2022.

In the face of tightening of global supply of ore, the demand for copper in India will continue to grow at a healthy rate of around 8 per cent. This is as it should be since this country with a per capita consumption of 0.6 kg is way behind China’s 6 kg and the global average of 2.7, says Santosh Sharma, chairman of HCL. What copper concentrate HCL makes is good to take care of about 5 per cent of national demand. This being the context, Sharma believes that by pulling out all the stops to achieve ore production to 20.2 mt in the next six years from 2018-19 output of 4.122 mt, which yielded 32,439 tonnes of concentrate, HCL will cement its long-term viability.