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Copper concentrate TC/RCs
How the coronavirus highlights the rigidity of annual benchmark pricing and the need to shift to a market-aligned mechanism.
Fastmarkets 2April 2020
On Thursday November 21, 2019, miner Freeport-McMoRan and smelter Jiangxi Copper agreed to a 2020 copper concentrate treatment and refining charge (TC/RC) benchmark of $62 per tonne/6.2 cents per lb – the lowest level in nearly a decade and down by 23% from the previous year.
Like all the preceding years, the teams negotiating the successful settlement spent months discussing the market’s supply-and-demand balance, weighing the relevance of recent multi-year lows in the spot market and debating their respective outlooks for the upcoming 12 months.
The best forecaster in the world, however, could not have predicted that concurrent with these negotiations nearing their conclusion, a microbe we now know as Covid-19 was breaking out in the Chinese city of Wuhan, Hubei province. Nobody could have foreseen the speed and extent to which the measures taken to limit its spread would impact commodity markets and the wider global economy.
RISKS OF LONG-TERM PRICING IN A DYNAMIC MARKET
Although market participants always know that spot prices may deviate from or fluctuate around the annual benchmark level over the course of a year, the tail risks of black swan events such as Covid-19 make painfully clear the hazards of agreeing to something as dynamic and critical as price up to a year in advance. Granted the misalignment is not yet anywhere near the gaping disparities accumulated in 2013 and 2019, but few would debate the extent to which today’s market landscape has changed so soon after annual terms were agreed.
Since the start of this year, spot prices for TC/RCs have risen by 20% from the mid-$50s/5 cents to a recent peak of $68/6.8 cents. With the spread between trader-purchase and smelter-purchase levels calculated at $7.55/0.75 cents, this implies smelters have been able to purchase spot cargoes easily into the low $70s/7 cents - around $10/1 cent above their agreed benchmark rates. The difference is even greater when compared with the traditional benchmark minus $5-10-per-tonne levels that many smelters agreed with traders for annual supply this year.
Now that smelters face a fairly dismal downstream demand picture for both refined copper and sulfuric acid (one of their major byproducts), market some participants might potentially need these TC/RC levels to remain viable. Those copper smelters without sufficient concentrate allocated for one-off purchases will not see the upside of rising spot TC/RCs and being tied into the annual benchmark terms could mean some difficult months ahead.
Fastmarkets 3April 2020
The fluid nature of the current situation also makes it especially difficult to justify an appropriate annual, or even quarterly, price. It is almost impossible to predict how long the threat of Covid-19 might affect various sectors that have a bearing on the copper market ecosystem. Will the first-quarter 2020 dip in industrial productivity be counterbalanced by a surge later in the year once government stimulus reignites consumer demand? Or will the outlook remain more subdued while sporadic new clusters of virus cases call for ongoing containment efforts? Indeed, in recent weeks significant concern has shifted toward the threat of supply side disruptions while the impact of Covid-19 has gone truly global. Whatever the uncertain future might hold, one thing is predictable: The spot TC/RC will most faithfully reflect the effect on the copper concentrate market.
AN ALTERNATIVE, MARKET-REACTIVE MECHANISM
In 2013, Fastmarkets’ copper concentrate index was launched to track the increasingly liquid spot trade in TC/RCs. Although the annual benchmark has continued to be negotiated each year since, the presence of the spot index - and the transparency it supports - increasingly exposed the differentials that can open up between fixed-term contracts and prices discovered in the free market.
The principle underlying an index-linked pricing mechanism is that the “price of the day” - discovered via the spot trade of marginal tonnes - can proxy the underlying supply-and-demand balance for the wider market at that time. If buyers and sellers link contracts to the average of the index over an agreed period, they can be assured that the value of their contract will fairly represent the market dynamics over their chosen timeframe. This ultimately means that spot TC/RCs could fluctuate with related prices in the copper supply chain, including finished metal, premiums and byproducts.
Figure 1 – Spot versus benchmark: Since its launch in 2013, Fastmarkets’ index for copper TC/RCs has brought transparency to the market price discovered through spot trade and increasingly highlighted the discrepancy between this and the annual benchmark. After several rounds of Chinese smelter expansions, the divergence reached its widest in 2019 with new smelters - lacking long-term contracts - sourcing more volumes from the spot market. In the first quarter of 2020, the situation reversed: spot TCs rebounded amid the virus-induced logistics lockdown, while the benchmark sat at its lowest point since 2011. Both scenarios have illustrated the rigidity of the benchmark mechanism and the difficulty for market participants to capture efficient value.
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Annual benchmark versus Fastmarkets' copper concentrate TC index
Fastmarkets' copper concentrates TC index, cif Asia Pacific, $/tonne Annual benchmark, $/tonneFastmarkets' copper concentrates TC index implied swmelters purchase price, $/tonne
Source: Fastmarkets
Fastmarkets 4April 2020
This effect is apparent in the context of current market conditions, where rising spot TC/RCs are, to a degree, compensating smelters for unfavorable downstream conditions in a way that a fixed annual benchmark price cannot.
Of course, at recent spot levels, many producers will be grateful that they locked in large contract volumes at the benchmark TC/RCs agreed in November 2019. Although, it is worth noting that the risks can run both ways.
Every year, and with seemingly increasing frequency, the copper concentrate markets are subject to events that are near impossible to foresee ahead of time, which swing the market higher or lower. In 2017, for example, workers at world’s largest copper mine Escondida were on strike for 49 days – the longest in history. The next year also witnessed a major market movement after India’s Sterlite Copper abruptly shut down. In both 2018 and 2019, market terms fluctuated considerably due to inconsistent and unpredictable expansion rates of Chinese smelters, with more newcomers eager to purchase spot tonnages.
During the past few years, the market has clearly been moving toward more short-term pricing and sales, placing more emphasis on the need for a robust tracker of spot activity. The fast-changing demand-and-supply balances are well reflected in Fastmarkets’ spot TC/RC index in a way that is hard for a fixed annual number to replicate in advance of the year.
MARKET INEFFICIENCY
Whichever direction the spot price takes, one side of the market is always liable to be out of pocket while the value of their long-term contracts are unable to react to an unpredictable change in conditions. Furthermore, such misalignments ultimately cause inefficiencies because they send delayed signals to the market.
Figure 2 – Accumulated inefficiencies: The grey area represents the market inefficiency of the annual benchmark. It divides the weekly spot versus benchmark gap by the benchmark price itself and sums this value across the year. Even a small inefficiency each week corresponds to a slight misallocation of capital from where it could have been most optimally spent. Add these up over time, though, and a 100% accumulated efficiency value would equate to a full week’s worth of absolute misallocation (the equivalent for example of TC/RCs that week being zero, or double, the agreed benchmark). The greater than 1,000% accumulated value in 2019, therefore, represents multiple weeks of business inefficiency, while the trajectory so far in 2020 is even steeper. In the current scenario, smelters are effectively receiving lower TC/RCs on their benchmark contracts relative to what the spot supply-and-demand balance indicates is fair value, with such locked-in pricing preventing them from being more dynamic with their allocation of valuable resources.
Source: Fastmarkets
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June 2013 June 2014 June 2015 June 2016 June 2017 June 2018 June 2019
Annual benchmark versus Fastmarkets' copper concentrate TC index
% of yearly accumulated inefficiency gapFastmarkets' copper concentrates TC index, cif Asia Pacific, $/tonne
Annual benchmark, $/tonne
Fastmarkets 5April 2020
For example, an annual TC/RC benchmark below the current spot price would keep producer profits artificially high and could counterproductively incentivize a supply increase. Likewise, consumers receiving lower treatment revenue than might be expected could be hesitant to invest in new capacity.
One of the largest accumulated inefficiencies developed last year between spot and benchmark prices since Fastmarkets’ index was launched, leading major participants to agree to mid-year deals ahead of the usual negotiating period.
THE RISK FALLACY OF SHORT-TERM PRICING
Perhaps the most common argument made in favor of annual benchmark pricing is the certainty it provides to both sides of the market. But the fallacy here is that the natural volatility in the market is simply artificially delayed in its impact, exposing participants to potentially large price changes at lower frequency.
It is no stretch to state that the viability of businesses can be at risk when long-term contract prices become significantly misaligned with the prevailing market conditions. For example, during one of the last major black swan events - the global financial crash of 2008 - such divergences between annual contracts and spot prices for iron ore led to multiple contract defaults and ultimately triggered a lasting shift to an index-based pricing system.
In fact, iron ore has since become a shining example of how the progression to a more mature pricing mechanism actually helps participants in a commodity supply chain manage risk. An index-based pricing system can facilitate the development of a parallel, exchange-based derivatives market, where participants exposed to the index might choose to hedge and lock in a price for a term that best suits their requirements, financial situation and risk appetite. Today, iron ore’s highly developed and liquid paper market is used by producers, consumers and traders alike to hedge exposure to price volatility.
With growing index exposure, the copper concentrate market is more than capable of emulating such development. Exchanges can play a key role in ensuring the progression to a market-aligned pricing mechanism that need not come with an increase in risk.
CRACKS SHOWING IN THE BENCHMARK
While some market participants still support the annual benchmark system, in recent years a growing number of market participants have been eager to shift to more flexible and varied pricing arrangements.
The first meaningful agitation since the benchmark system was established in the 1980s came in 2011, when BHP successfully pushed for multi-tier pricing that led smelters to offer a combination of quarterly, half-yearly and yearly deals for TC/RCs.
In subsequent years, spot assessments and indices published by research houses and price reporting agencies such as Fastmarkets have become increasingly referenced in shorter-term contracts - either as the primary settlement mechanism or as fallbacks in the event that a negotiated rate cannot be agreed. Today, the list of companies referencing Fastmarkets’ TC/RC index in some fashion in contracts covers those from all sides of the market and in multiple regions.
Large divergences between the spot index and annual benchmark over the past two to three years have only added to the pressure on the long-term pricing
Fastmarkets 6April 2020
system. In June 2019, miner Antofagasta and smelters Jiangxi and Tongling broke ranks to sign early first-half 2020 contracts at rates that more closely reflected the prevailing spot market level than the benchmark agreed more than half a year earlier.
“It will be interesting to see how things play out in the next 12-18 months - this is not the end of the benchmark system, but it’s a step in that direction,” a mining source said of the unusually early settlement.
“The market is not yet so volatile that it needs quarterly or half-year pricing, but things can change,” another source said.
Currently, however, it is hard to conclude that there has since been much reduction in volatility and uncertainty.
TRANSPARENCY
A widely appreciated aspect of the annual benchmark system has been the transparency it brings to the industry’s pricing, even if only once a year. The visibility of a single, year-long TC/RC for clean concentrate allows smaller players in the market to align as a herd with the “going rate” and thereby gives assurance of their competitiveness.
At Fastmarkets we recognize the market’s need for a mechanism it can trust, and therefore have focused on providing the highest levels of transparency on our pricing. Alongside the weekly TC/RC index, Fastmarkets publishes a rationale illuminating that session’s calculation, in addition to an editorial commentary on market conditions and a weekly index newsletter featuring data insights on the spot market’s liquidity and index analytics.
We also appreciate that the copper concentrate market is more than just one single number, and as such publish indicators of spot data-implied price adjustment factors for differing copper contents (Cu-VIU) and the differentials observed between trader-purchase levels and smelter-purchase levels (the “Counterparty Spread”).
But perhaps the most critical element underpinning the industry’s trust in an index is the logic, clarity and robustness of the methodology behind it. Fastmarkets’ methodology for the copper concentrate TC/RC index is based on a tried and tested template that we apply for some of our highest-profile benchmarks in an array of other markets.
Based on an objective, data-driven model that elevates the impact of actual confirmed transactions, the methodology safeguards fairness and balance for both sides of the market.
Figure 3 – Shining a light: The Fastmarkets copper concentrate TC/RC index weekly newsletter contains an array of supplementary data insights and information beyond the latest index figures.
Copper Concentrates Index Report Methodology guide
INDICES Code Incoterm/ Location
Today's Price
PreviousPrice
Monthly Average
Previous Month
Quarter Average
Previous Quarter
Year Average
Previous Year
TREATMENT CHARGES TC Asia-Pacific 65.5 63.2 65.5 66.1 65.5 61.4 61.7 56.9
REFINEMENT CHARGES RC Asia-Pacific 6.55 6.32 6.55 6.61 6.55 6.14 6.17 5.69
Current Last 3 months
Quarter q1 2020
Last 6 months Year 2020
2.77 8.09 8.69 8.89 8.27
66.89 66.26 66.56 62.44 66.35
64.12 58.17 57.87 53.55 58.08
-0.82 -1.35 -1.40 -1.20 -1.36
25.8% 25.9% 25.9% 25.9% 25.9%
03 April 2020
Change
+2.3
+0.23
INDICES
Clean Avg. %Cu seen
Coefficients
Counterparty spread ($/tonne)
%CuVIU ($/tonne)*
Implied Smelters purchase ($/tonne)
Implied Traders purchase ($/tonne)
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Feb-19 May-19 Aug-19 Nov-19 Feb-20
Treatment Charges Index ($/tonne)
0.0
0.1
0.2
0.3
0.4
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0.6
Feb-19 May-19 Aug-19 Nov-19 Feb-20
Herfindhal index(concentration of data by tonnage and data providers. Lower values less concentration)
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Feb-19 May-19 Aug-19 Nov-19 Feb-20
Number of observations collected
COUNTERPARTY SPREAD AND COPPER CONTENT VIU*Values are adjusted for counterparty
COPPER CONCENTRATES INDICATORS
TCs spread means the difference in TCs collected for a given date once they have been normalised. Itshows the market consensus .
· Counterparty spread measures the average $/tonne difference between the material purchased by smelters andmaterial purchased by traders. A value of $10/tonne means smelters are getting paid $10/tonne more than traders onceall the other factors have been controlled for.
· %Cu VIU measures how much $/tonnes extra the TC is priced for each %Cu content extra.
Inaki VillanuevaPrincipal [email protected]
Julian LukSenior Market [email protected]
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Feb-19 May-19 Aug-19 Nov-19 Feb-20
TCs spread ($ difference vs Metal Bulletin TC Index)(70% of the normalised prices fell within this $ range)
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Smelters vs Traders purchase spread($/tonne differential between Smelters purchase and Traders purchase once other
price affecting factors has been accounted for)
Archie HunterBase metals editor, [email protected]
Anna Xu Market [email protected]
-1.6
-1.4
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20
Copper VIU(measures how much the TC changes in $/tonne with one extra %Cu content)
click here for more information about Herfindhal
Fastmarkets 7April 2020
Figure 4 – By the market, for the market: Widespread industry participation and consistently large numbers of high-quality data points submitted underpin the robustness and reflectiveness of Fastmarkets’ index.
Furthermore, our expert price reporters and editors ensure the collection of high-quality information and remove data that might unduly distort the calculation. We are committed to complete transparency of our calculation processes and our methodology is always available on our website.
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Q12018
Q22018
Q32018
Q42018
Q12019
Q22019
Q32019
Q42019
Q12020
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Q12018
Q22018
Q32018
Q42018
Q12019
Q22019
Q32019
Q42019
Q12020
Number of price points collected
Number of companies
Source: Fastmarkets
Source: Fastmarkets
0
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Q12018
Q22018
Q32018
Q42018
Q12019
Q22019
Q32019
Q42019
Q12020
0
10
20
30
40
50
60
Q12018
Q22018
Q32018
Q42018
Q12019
Q22019
Q32019
Q42019
Q12020
Number of price points collected
Number of companies
Source: Fastmarkets
Source: Fastmarkets
Number of price points collected Number of companies
Archie HunterGlobal Copper EditorEditor – Base Metals [email protected] Peter HannahIndex [email protected]
Julian LukSenior Reporter – Base [email protected]
Inaki VillanuevaPrincipal [email protected]
Anna XuReporter –Base [email protected]
Jane FanIndex [email protected]
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