Value-added segment to help copper smelters offset margin pressure

Global smelters are negotiating conversion charges which indicate a decline from 2017 levels

A sharp decline in income from the copper business due to lower treatment and refining charges (Tc/Rc) is a concern for India’s primary base metals producers including Hindalco Industries and Vedanta, but their focus on value-added copper products and firm aluminium prices should help offset any potential income decline in the copper business.

Global copper smelters led by Jiangxi Copper Corporation and Guixi of China are negotiating with global miners for conversion charges ranging at $70-89 a tonne (Tc) and refining charges (Rc) of US cents 7.0-8.9 a pound (about 450 gm) for the calendar year (CY) 2018. These ranges of Tc/Rc works out to 3-24 per cent lower than $92 a tonne (Tc) and US cents 9.2 (Rc) global smelters realised in CY2017.

India’s custom copper smelters including Hindalco and Vedanta procure concentrate from global miners on both long-term contract as well as on a spot basis and earn Tc/Rc from their business. Variations in Tc/Rc determine an increase or decline in the top line and bottom line of their copper smelter business. Currently, global smelters see $80-85 a tonne of Tc and US cents 8.5 a pound as Rc as profitable. Almost a similar profit benchmark works out for Indian smelters including Hindalco and Vedanta.

“Global smelters are yet to arrive at a final decision on Tc/Rc. Over the last few years, we have worked out hard to reduce our cost of copper production through improvement in plant efficiency and diversification towards value-added products so that we would be able to make up for the (any) decline in Tc/Rc. Our new copper rods plant is expected to start commercial production sometime in April next year. Despite that, reduction in Tc/Rc will certainly have an impact on margins of our business,” said P Ramnath, chief executive officer, Sterlite Industries (India), the copper division of Vedanta.

Hindalco and Sterlite Industries have an installed copper production capacity of 500,000 tonnes and 400,000 tonnes, respectively. 

Their respective capacity utilisations stood at 75.4 per cent and 100 per cent for FY17. Both Hindalco and Vedanta posted an increase in their earnings from the copper business in the September quarter despite lower volumes due to a sharp increase in their realisation from the currency and commodity businesses.

“Globally, the Tc/Rc rates for copper are likely to weaken in the near term on account of constrained mine supplies, which is likely to have an adverse impact on the profitability of custom smelters. In India, while the copper businesses of large players like Hindalco and Vedanta would be impacted, the same is likely to be offset by an expected margin improvement in the aluminium business in the case of Hindalco. However, the same for Vedanta will be partially negated by rising costs of aluminia and carbon, since it has to depend upon external sources of bauxite/alumina,” said Jayanta Roy, senior vice-president (Group Head - Corporate Sector Ratings), ICRA.

Outside the base metals business, Vedanta, however, could also find some cushion from rising oil prices, given its exposure through Cairn India, which produces close to 200,000 barrels of oil per day in its Rajasthan-based hydrocarbon assets. A small support could also come from firm iron ore prices.