China’s copper boom tested as miners squeeze smelters

The unrelenting expansion of Chinese copper processing capacity over the past few years has now become a global headache, as smelters scramble to secure the ore they need to produce the vital industrial metal.

Output in the world’s top producer of the refined metal has ballooned to a record this year, even in the face of trade tensions wars that are clouding the outlook for demand. The resulting competition has handed bargaining power to some of the world’s largest miners.

Copper treatment charges, typically a key earner for processors, have plunged deep below zero on the spot market. Chilean miner Antofagasta Plc has proposed negative charges for contracted supplies to smelters in the second half.

The fraught situation for smelters worldwide is fueling expectations of cuts — Glencore Plc shut a facility in the Philippines in February. It’s also focusing market attention on the surprising resilience of China’s output, and raising the question of how long that can last.

Analysts and industry executives say China’s output is more resistant to financial pressures because it is now dominated by state-owned producers and by relatively large, efficient and low-cost smelters.

Three major new plants were opened just last year, more than offsetting the pain felt by more modest operations. Customs data isn’t showing signs of China struggling to get ore supplies for its plants, with copper concentrate imports up 7.4% in the first five months of the year.

But there’s also a still-substantial segment of China’s market that is made up of smaller smelters with more exposure to a tightening spot market. Researcher CRU Group says plants outside the Copper Smelter Purchasing Team — a group of major producers that negotiates benchmark treatment charges — represent about a fifth of the country’s output.

“Even if you have very deep pockets and are willing to operate at a loss, at the end of the day you might have to cut production because you simply cannot get the copper concentrate,” said Craig Lang, principal analyst at CRU Group.

The stakes are high for the global copper smelting industry. With all high-cost facilities facing losses, every ton that resists financial pressure in China means more pain for those elsewhere.

Spot treatment charges to process concentrate fell to negative levels in December, and reached minus-$60 a ton last month. The fees are deducted from the cost of concentrate and ordinarily make up a large chunk of smelter revenues. Term supplies are now threatening to slide into negative territory too, meaning smelters are effectively paying more for copper ore than the value of the metal contained in it.

In February, when fees were less punitive than they are now, Glencore Plc Chief Executive Officer Gary Nagle said he wouldn’t keep open loss-making copper plants. The company mothballed a smelter in the Philippines and is cutting costs at plants in Canada.

Older European copper smelters could be at risk, while Japanese plants may be sheltered due to their parent companies’ stakes in Chilean mines, said Grant Sporre, an analyst at Bloomberg Intelligence. “It’s going to be a tough battle for survival.”

Outlook worsening

Granted, the plunge in fees is partly due to relatively slow growth in mine output worldwide — but it’s primarily driven by the rapid increase in smelting capacity. China’s refined copper output is set to rise 10% in the first half of this year and nearly 5% for the full year, according to researcher Shanghai Metals Market.

The argument for China’s resilient output rests largely on the belief that state-owned plants are protected because local governments want to safeguard jobs and the economy.

“This is a consequence of an economic model that is less responsive to prevailing market conditions as plants can run on very thin margins — or even make losses — for extended periods of time,” Savant, a joint venture by Marex Group Plc and geospatial analysis company Earth-i, said in a note last month.

Although cutting overcapacity across the Chinese economy has become a more important policy priority for Beijing recently, so called ‘future-friendly’ industries like copper, a metal required for electrification and so for the energy transition, are being given more leeway than sectors seen to be in structural decline, such as oil refining.

For producers outside China, there is no such cushion. The suspension of Ivanhoe Mines Ltd.’s Kakula copper mine in central Africa has been a blow to ore supply — and at the same time developments like the ramp-up of Freeport McMoRan Inc.’s Manyar smelter in Indonesia are adding more refining capacity to the market.

Big smelters may still be able to maintain production for now, following some years of healthy cash flow, said Yongcheng Zhao, an analyst at Benchmark Minerals Intelligence Ltd. The less-efficient ones, though, are at risk.

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