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Declining TC/RC margins expected to hit Hindalco, Sterlite

Thursday, June 21, 2007

BHP Billiton has recently negotiated with smelters at lower TC/RC of 5-5.5 cents a pound. Processing of deal between BHP and Japanese smelters is often seen as the benchmark. Mid-year fees represent a sharp decline from those for calender 2007, which were mostly set at $ 60/6.0 cents. No price participation was included, which resulted in the TC/RC of smelters falling substantially over the last few months.

Why are TC/RC so important for copper companies? Smelters and refiners generally buy copper concentrate at a slight discount to the London Metal Exchange price. This discount is towards the costs incurred in treating and refining the concentrate to obtain pure metal. For the smelter operators this is the source of their income. Tc/Rc charges are determined as a function of the relative scarcity of copper concentrate. If there is an abundance of concentrate available, the Tc/Rc rates are high. Tc/Rc charges are depressed due to lowered availability of copper concentrate in the market.

Spot TC/RC was estimated at 12-13 cents a pound compared with 20-22 cents a pound at the end of the March 2007 quarter. Global deficit of copper concentrate in CY06 was estimated at 290,000 tonnes. Deficit of copper concentrate of 500,000 tonnes in calendar year 2007.

Impact on Hindalco:

Falling copper TC/RC is expected to hit large domestic smelters such as Hindalco and Sterlite Industries. Copper contributes 60% to revenues, but 15% to the EBIT. They recently closed a smelter due to shortage in the concentrate market. The recent sharp reduction in spot TC/RCs led to production closure at one smelter. Brokerage group Citi has factored in weakness in TC/RC margins for FY08 valuations. CLSA says Hindalco's FY08 average TC/RC is likely to be 20c/lb down from 34c/lb.

Impact on Sterlite:

Copper contributed 48% to the revenues, 16% to the EBIT. In the March 2007 quarter, they reported a 16.4% y-o-y decline in its copper division's profit despite the production of copper cathodes rising 18.7% y-o-y to 89,000 tonne during the same period.

Posted by FR at 5:43 PM  


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