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BHP May Win Lower Copper Fees on Tight Supplies, Eugene Investment Says

BHP Billiton Ltd., the world’s largest mining company, may win a reduction in mid-year copper processing fees, said Kim Gyung Jung, an analyst at Eugene Investment & Securities Co.

The fees are typically negotiated twice a year, with most of the volume handled through the year-end accords. BHP, based in Melbourne, got a 38 percent reduction from at least two Japanese smelters in January, company executives said at the time. They were set at $46.50 a metric ton for smelting and 4.65 cents a pound for refining.

“A level at $39/3.9 cents is highly possible, given lower fees on the spot market,” said Kim, director of the basic-metal sector at Eugene Investment in Seoul. Kim said he hadn’t heard that an agreement had been reached.

Processing fees have fallen as smelters expanded faster than supply from mines. Smelters will use 77.5 percent of their capacity on average this year, compared with 86.2 percent five years ago, Morgan Stanley said in a report on June 23. The treatment and refining charges usually drop when there is a shortage of raw material and smelters compete for deliveries.

LS-Nikko Copper Inc., which operates the world’s third- largest copper refinery and smelter, denied today a report that it had agreed to a cut in processing fees with BHP. Brook Hunt, a U.K. researcher, told clients in a report this week that BHP agreed to pay $39 a ton and 3.9 cents a pound in charges. Fiona Martin, a spokeswoman for BHP in Melbourne, declined to comment.

Conditions Worsen

Fees at that level would be about what analysts expect, said Atsushi Yamaguchi, a Tokyo-based analyst at UBS AG.

Should contracts be agreed at that price, it would be the lowest level since 1973, according to data compiled by Hirosuke Chihara, a researcher at the state-run Metal Economics Research Institute of Japan.

“Conditions are getting worse for smelters,” said Takashi Murata, an analyst at Daiwa Securities Capital Markets Co. in Tokyo. “The mid-year contracts are not that significant, but the number will set a direction for upcoming talks for the most important calendar 2011 deals.”

Copper smelters buy concentrate, a semi-processed form of ore used as a feedstock, at a price based on the London Metal Exchange benchmark minus processing fees.

“Copper concentrate supply remains constrained,” UBS’s Yamaguchi wrote in a report on June 11. “Procurement based on mid-year talks is relatively small at all the companies and so any negative impact on earnings is likely to be minimal.”

Concentrate Shortage

The copper concentrate market will have a shortage for three years after mining companies delayed projects because of lower prices, according to Javier Targhetta, Freeport-McMoRan Copper & Gold Inc’s senior vice president of marketing and sales. The shortage will be 500,000 tons to 1 million tons this year, Targhetta said June 6.

LS-Nikko is a joint venture between South Korea’s LS Corp. and a Japanese group led by Nippon Mining & Metals Co.

Pan Pacific Copper Co., Sumitomo Metal Mining Co. and Mitsubishi Materials Corp., Japan’s top three producers of the metal, have not reached any deal with BHP, according to spokesmen Kan Komatsuzaki, Masashi Takahashi and Hisato Matsubara. The July contracts with mining companies cover about 10 percent of annual volumes processed in Japan.

Pan Pacific is 66 percent owned by Nippon Mining & Metals Co., a unit of Nippon Mining Holdings Inc. Mitsui Mining & Smelting Co. holds the remaining share.

To contact the reporters on this story: Jae Hur in Tokyo at jhur1@bloomberg.net; Anna Stablum in London at astablum@bloomberg.net

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