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:: Smelters Thought To Be Behind Copper Probe
Analysts believe it is unlikely leading global copper concentrate producers including BHP Billiton, Rio Tinto and Freeport-McMoRan will be charged with collusion by European or North American competition authorities, who have launched an investigation into the supply industry.
It is understood the regulators, who served notices on several copper concentrate miners this week, are looking to establish whether suppliers to the custom smelter market have been acting as a cartel. BHPB, one of the major players regulators dropped in on, says it currently has no reason to think the group is the prime target.
The investigation comes at a time of unprecedented tightness in the concentrate market, which has led to an increase in copper concentrate demand when availability of both copper concentrate and copper scrap has fallen significantly, and which has in turn seen smelters’ treatment and refining charges plummet to their lowest levels in almost two decades. “The profitability of custom smelters is under acute pressure," noted Deutsche Bank analyst, Peter Richardson. And negative currency movements over the past year or so have also further eroded treatment and refining revenues, which are set in US dollars.
Suffering smelters may well have initiated the proceedings, according to JB Were analyst, Malcolm Southwood. “While we don’t know that a smelter (or smelters) is the source of the investigation, it is entirely conceivable that one or more concentrate buyers might have petitioned the authorities under these market conditions," he said.
About 40-45 percent of the 10.5 million tonnes of copper concentrate produced worldwide is sold to the custom smelting market, which is dominated by Japanese smelters, with China, Korea, Germany, Finland and Sweden rounding out the top six consumers. The balance of annual concentrate output is treated at integrated smelting facilities under common ownership with mining operations. A total of 12 mines including five in Chile and two in Indonesia account for almost 70 percent of custom concentrate supply.
BHPB and Rio are the world’s two biggest resources companies. Rio has minority stakes in the two largest sources of copper concentrate to custom smelters, Escondida in Chile and Grasberg in Indonesia. These operations are joint ventures with BHPB and Freeport respectively. Such a structure where one company has perceived strong connections to two companies controlling those globally important mines is of course no proof of anti-trust practices. In addition, BHPB, Codelco and others have recently either cut back production or sales or closed high-cost mines, which appears to have been designed to shore up the copper price.
Melbourne-based Richardson thought it unlikely the investigation would come to anything. “We suspect that competition authorities will be hard pushed to prove … anti-competitive behaviour when the driving force behind the reduction in mine output over the past 15 years has been very low copper prices," he said. “Under these circumstances, a reduction in output is a logical and justifiable response to harsh economic reality, not prima facie evidence of venality."
Allegations of market manipulation aimed at producers are nothing new in this sector nor in others such as iron ore, with consolidation of ownership irking some buyers, especially the Japanese, now that supply control is in fewer hands and that the balance of pricing power seems to have shifted to producers. But an investigation is a bit of a surprise.
If a cartel can be clearly shown to be taking place, then perhaps the suppliers might be in a spot of bother. “There is of course, a considerable irony here," London-based Southwood said. “For many years it has been perceived that the Japanese copper smelting companies worked together to buy copper concentrate."
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