Metals group CRU plans copper TC/RC indexes, eyeing pricing shift

Melanie Burton
Thursday, 21 Nov 2013 | 6:18 AM ET

* Indexes still in industry consultation phase

* Opportunity for indexes comes as benchmark system fragments

* But too few spot deals, complexity of market could be hurdles

SINGAPORE, Nov 21 (Reuters) - Metals consultancy CRU Group plans to launch in 2014 indexes that will for the first time price the fees miners pay smelters to produce copper, cashing in on a trend of commodities pricing moving towards spot markets from long-term contracts.

The development of the indexes has the backing of Anglo-Australian miner BHP Billiton, industry sources say. If successful, it may help shake up the world's second-largest base metal market in a similar way to the larger iron ore market which moved to spot rates from annual deals three years ago.

But copper may prove a tougher market to crack than bulk commodities such as coal or iron ore, given it is a fraction of the size and much more complex, some industry sources say.

The treatment and refining charges (TC/RCs) are typically hammered out in talks between large miners such as BHP and smelters like Pan Pacific Copper, with prices fixed for the year and the first major deal set as an industry benchmark.

"Everyone keeps talking about the breakdown of the benchmark system. We've seen it fragmenting in recent years with more players coming in - that made us think there may be room for an index," said Christine Meilton, a principal consultant at London-headquartered CRU.

She said CRU could launch a trial index early next year, which if successful could lead to launch in time for next year's annual negotiations that typically start around LME week in October.

CRU already has an established index unit. The largest U.S. futures exchange operator, CME Group Inc, uses a CRU index for settlement against its domestic hot-rolled coil steel futures contract.

In the alumina market, which also moved to index-based pricing in 2010, CRU's alumina index is referenced by the world's top aluminium producer, United Company Rusal, in its contracts.

In recent years, BHP has pushed for better terms from smelters than those won by its rivals, arguing its higher purity concentrate deserves lower processing fees, given smelter's costs are based on volume of throughput rather than copper contained.

The miner, which controls top global copper mine Escondida, in Chile, has also pushed for shorter dated contracts, reasoning that prices that more closely track the spot market deter defaults on long-term contracts.

"There is certainly a push for shorter term pricing, and if the industry does go this way then there us room for an index," Meilton said.

BHP Billiton declined to comment.

But other miners and smelters may not offer their backing to the indexes because it could erode their bargaining power and increase competition, traders say.


CRU is considering three indexes: a standard and high grade contract, and a contract based on standard grades but specifically for deals done between traders and smelters.

The consultancy's indexes will adjust for freight and financial terms such as month of payment and quotational periods. For months when there are fewer trades, data providers will estimate prices to which CRU will give a smaller weighting.

But the low number of spot deals, amounting to around 30 percent of the annual copper mine supply, is a top concern for some industry sources who worry low liquidity could leave prices open to manipulation.

"The model takes into account perhaps 6 or 7 different reference points. If you really wanted to game the system.. you could load weightings into other parts of the contracts," said one source at a miner.

Meilton said CRU's research unit would be monitoring any deals submitted for unusual trades, stripped of names, as well as asking data providers to sign legally binding agreements.

Industry sources also noted the difficulty in distilling to a formula the unique mix of minerals in copper deposits. Further, blending of concentrates, the technical capabilities of the smelter and byproduct minerals factor in long-term contract talks and those won't be reflected in an index, they noted.

"Anyone who thinks it could be automated is neglecting the complexity of the industry," a second mining source said.