Indian copper companies may have some good news for investors in the near future, even if it’s short-lived. Copper has been one of the leading gainers among non-ferrous metals, rising by 21% to $9,023 (around Rs4.06 lakh) a tonne on the London Metal Exchange (LME) since early January, compared with a 4.5% increase in aluminium and 2% decline in lead prices. That is good news for state-run copper miner Hindustan Copper Ltd, which is planning a follow-on public offer to raise funds.
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International copper prices are rising due to increasing demand, leading to falling LME stocks (down by 30% over a year ago), investor-led buying and a weak dollar, said Xstrata Plc, an international copper producer, in a recent presentation to investors. Rising copper prices is not a new phenomenon. But in the past, higher prices have done little for shareholders of copper producers such as Hindalco Industries Ltd and Sterlite Industries (India) Ltd.
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These companies run custom smelting operations, buying copper concentrate from global mining companies, and processing it into copper cathodes. Their profitability depends on the treatment and refining charges (Tc/Rc), which miners pay them. Higher the charges, better are their margins. After the global financial crisis, when commodity prices collapsed, mining companies went slow on expansion and held back output growth, even as new smelting capacities came on stream. The result was a sellers’ market for the miners, which saw Tc/Rc plummet.
But that has changed in recent months. Japanese copper smelters have been cutting back output, and according to news reports, the country’s four main smelters plan to cut output by about 10% in the second half of fiscal 2011. Certain Chinese smelters have shut down operations temporarily, to comply with energy conservation rules. Both factors have led to lower demand for copper concentrate and changed perceptions about the demand-supply balances.
Last week, news reports quoted a Goldman Sachs estimate stating benchmark Tc/Rc for 2011 will be 29% higher than this year. Indian copper smelters operate both on the basis of long-term contracts and in the spot market, and will hence benefit from higher Tc/Rc.
Hindalco and Sterlite’s copper businesses have been underperformers relative to the aluminium business in the past few quarters. Hindalco’s copper segment profit fell by 41% in the September quarter, compared with the year-ago period, while the aluminium business profits rose by 64%. The second half may see an improvement in the copper business.
While the picture over the next few quarters appears promising, the longer-term picture is not expected to change significantly. Mining companies believe that while demand for copper will continue to increase, mining output will not shoot up dramatically. Rising demand from China will drive up the global concentrate deficit, said Rio Tinto Plc in a presentation to investors, as new low-cost smelting capacities will drive up demand for copper concentrate.
The Xstrata presentation says that lower access to capital, after the global financial crisis, has delayed mine expansion projects. The probable mine project supply growth this year is about 2.5 million tonnes below what was projected in 2008. Mining companies also believe that new projects are coming up in challenging geographies, and have to face poor infrastructure and higher political risk.
If copper prices touch astronomical heights in 2011, then they may step up output to capitalize on better realizations. That will also increase the availability of concentrate in the market and signal better days for custom smelters. Till then, the hike in Tc/Rc may be just a temporary reprieve.
Graphic by Yogesh Kumar/Mint
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