Active Stocks
Tue Mar 19 2024 10:21:08
  1. Tata Consultancy Services share price
  2. 4,021.35 -2.98%
  1. Tata Steel share price
  2. 148.85 -0.50%
  1. NTPC share price
  2. 312.80 -1.37%
  1. HDFC Bank share price
  2. 1,441.40 -0.33%
  1. Power Grid Corporation Of India share price
  2. 263.10 -0.72%
Business News/ Market / Mark-to-market/  Cut in fees for smelters is a risk for domestic copper producers
BackBack

Cut in fees for smelters is a risk for domestic copper producers

In the near-to-medium term, the annual benchmark rates for copper treatment and refining will partly determine how Hindalco Industries and Vedanta's copper divisions perform in FY19

For the smelters, fees represent actual income and the underlying copper price is not as relevant, while miners profit from the copper price net of the fees. Photo: BloombergPremium
For the smelters, fees represent actual income and the underlying copper price is not as relevant, while miners profit from the copper price net of the fees. Photo: Bloomberg

Copper smelters and miners are in a standoff over the annual benchmark rates for copper treatment and refining charges (TC/RCs). India’s custom copper smelters, run by Hindalco Industries Ltd and Vedanta Ltd, will be keenly awaiting the final outcome. Investors should too. These charges are one determinant of their copper division’s profits in the forthcoming fiscal year.

In the September quarter, Hindalco’s copper segment profits had risen sharply, despite lower volume, which the company attributed to higher by-product realizations and favourable macros which led to some gains on the currency and commodity fronts. These may or may not continue. Vedanta’s profits too rose due to higher volume and lower costs.

The real determinant will ultimately be TC/RCs and volume. The expectation was that the 2018 benchmark will be at the same value as 2017 but the standoff puts a question mark on that.

The past few years have seen a declining trend in the annual benchmark. Fees are negotiated between the miners who supply copper concentrate, and the smelters who convert it to copper cathodes and further value-added products. For the smelters, fees represent actual income and the underlying copper price is not as relevant, while miners profit from the copper price net of the fees.

At this point, Chinese smelters who are negotiating their annual contracts believe that the concentrate market will be in a surplus state. Also that they need higher fees to compensate for the pollution-mitigating measures they have to take due to China’s anti-pollution drive, according to news reports. In fact, the floor price for the fourth quarter TC/RCs was set by Chinese copper smelters higher by 10% over its previous level, as supply was good and demand was seen to be relatively low.

Last week, Bloomberg reported that China’s second-largest copper smelter will idle 20-30% of its smelting capacity, as part of winter curbs in China to cut pollution. This was a week after the annual talks were suspended as smelters and miners disagreed on the fees. Lowering available capacity signals lower demand for concentrate.

Miners have a different view. The International Copper Study Group’s 2017 data shows that till August, the market saw a deficit of 52,000 tonnes although this is lower than the 139,000 tonne deficit in the same period last year. There are also risks of cuts in supply due to strikes in important copper mining countries. That makes miners seek lower fees.

The talks are now likely to be finalized in the first quarter of 2018. The past few years have seen a bearish trend in TC/RCs in annual contracts. If smelters can hold 2017’s level, that will be a positive point for domestic producers. A cut can put pressure on domestic copper smelters but they do benefit if they can increase volume or prices of by-products increase. Still, lower fees make them more vulnerable.

One way out is to sell more of value-added products. Another is to expand smelting capacity. Vedanta has plans to double its smelting capacity to 800,000 tonnes while Hindalco Industries plans to double its continuous cast copper rod capacity to grow share of value-added products.

In the near-to-medium term, the annual price benchmark will partly determine how their copper divisions perform in fiscal year 2019. In the longer run, the expansions to their capacity should yield benefits of volume or higher value addition, as the case may be.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 12 Dec 2017, 08:05 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App