Physical markets

Despite the recent sell-off, LME three-month copper prices are trading with year-to-date gains of 17.2% based on September 22 closing prices. This was preceded by a 17.0% rise in 2016.

Copper prices are determined by trading on exchanges. In the long term, the underlying demand-supply equation could be expected to drive commodity prices, and copper is no exception.

Chart in Focus: How Physical Markets Reflect the Copper Landscape

Short-term drivers

However, in the short term, sentiment also plays on commodity prices. Copper is particularly sensitive to macroeconomic events, and it has demonstrated the ability to foreshadow the global economy (ACWI).

If we look at physical markets, analysts see copper treatment charges and refining charges, which are popularly known as TC/RCs, as an indicator of physical markets. TC/RCs are a charge that copper refiners receive to process copper concentrate (SCCO). Because these charges are settled directly between copper producers and refiners, they tend to reflect physical market sentiment.

Copper concentrate

When copper concentrate supply is tight, one would expect TC/RCs to fall, as there is limited concentrate availability. However, in times of ample concentrate supply, TC/RCs generally rise.

Earlier this year, there was a shortage of copper concentrate due to issues at mines such as BHP Billiton’s (BHP) Escondida and Freeport-McMoRan’s (FCX) Grasberg. Copper prices also rallied in 1Q17 as the physical copper market tightened.

Looking at the current scenario, Chinese smelters have increased their TC/RCs 10%, according to While financial markets have been optimistic about copper’s demand-supply equation, physical markets don’t seem to share the same optimism. We saw something similar in aluminum where physical delivery premiums have been sagging despite the steep increase in aluminum prices.

In the coming article, we’ll see how analysts are rating copper producers ahead of 4Q17. Let’s begin by looking at Glencore’s (GLNCY) ratings and target prices.

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