By FN Arena

SB Citigroup suggests the big copper miners are currently in a strong bargaining position with respect to the next round of 6-monthly contract treatment and refining charges (TC/RC) negotiation with the smelters. Smelter concentrate stocks have declined and supply has been disrupted by operational difficulties and strike action.

For various reasons, stoppages have occurred recently in Mexico , Zambia , Indonesia and Chile . As these mines are struggling to perform, Citigroup notes BHP Billiton (BHP) has taken the opportunity to push for a change in TC/RC charges.

Under a longstanding arrangement, copper smelters have enjoyed a "price participation" (PP) element to their charge of 10% of the difference between US90c/lb and the prevailing spot price. As the spot price is currently around US$3.50/lb, the smelters have been enjoying a windfall that sees the PP component more valuable than the TC/RC charge itself.

Citigroup notes the PP component can be higher than the charges themselves.

Contract charges were reduced by 16% at the start of the year, but the spot TC/RC charge has fallen to US7.7c/lb or less, Citigroup reports. BHP doesn't believe further contact reductions will be acceptable to the smelters, so it's proposing changes to the way the windfall PP is calculated: abolish it, cap it, or raise the US90c/lb level.

Citigroup believes the PP will stay, but feels the smelters will likely have to accept some rise in the level as acknowledgement that costs across the industry have increased significantly.