Chinese imports of copper cathodes dropped around a tenth to 1.2 million tonnes over the first five months in 2019 from a year earlier.

Accordingly, Fastmarkets assessed the copper grade A cathode premium, cif Shanghai - a useful gauge for the country’s demand for copper imports - at $50-68 per tonne on Friday July 5. The benchmark premium is down 15% since the start of his year, signaling lackluster demand for overseas cathodes.

But while imports of cathode were falling, imports of concentrates rose by 16.6% to 9.1 million tonnes in January-May from a year earlier despite tightness in supply of mined copper around the world, which is reflected in low treatment and refining charges (TC/RCs).

Fastmarkets’ copper concentrates TC/RC index, cif Asia Pacific, stood at $52.4 per tonne/5.24 cents per lb on Friday July 5, its lowest since the index was launched in June 2013.

More surprising - given a series of stringent curbs - is the rise in copper content in scrap imports to China. The copper contained in foreign material shipped to the country in January-May this year of 532,356 tonnes was up from 520,613 tonnes a year earlier.

One reason for the drop in the cif Shanghai premium for refined copper - and for the jump in imports of copper raw materials earlier this year - could be higher-than-expected domestic output of cathode, BofA Merrill Lynch commodities strategist Michael Widmer suggested.

But while imports of copper scrap are likely to drop in the second half because of a new quota system that comes into effect this month, copper concentrate imports look set to rise to meet demand from smelters in China, which are boosting output.

China is not self-sufficient in copper concentrates but is home to the world’s largest copper smelters, which will increasingly have to rely on imported concentrates to meet their feed requirements.

“China only takes up around 8% of mined copper output while its copper smelting capacity accounts for roughly half of the world’s total,” Widmer said.

Chinese production of copper cathode in the first five months of this year of more than 3.7 million tonnes was up 4.4% year on year, according to the National Bureau of Statistics.

Copper cathode consumers have been increasingly drawing on local supply instead of buying from overseas.

Copper stocks were steadily drawn down from Shanghai’s bonded zone across April-June to feed the market. Bonded copper stocks dropped by 24% to 435,000-441,000 tonnes on July 1 from the start of April.

Meanwhile, output from overseas, mainly Chile, has been lower than usual, caused in part by delays at Codelco’s Chuquicamata division in meeting emissions standards.

“As the Chuquicamata smelter is not working well, more concentrates have been shipped to the spot market but not refined cathodes. The refined cathodes of Codelco are normally sold to China,” Colin Hamilton of BMO Commodities Research said.

Codelco’s customers in China have this year been receiving the minimum tonnages of copper cathodes stipulated in the contracts. Since Codelco’s ENM and CCCP copper cathodes are regarded as quality brands in the Chinese market, they typically command a higher premium than others.

But the trend of growing supply of copper concentrates from Chile also reflects China’s increasing capacity in cathode production. Around 600,000 tonnes per year of copper smelting capacity will come online this year in China, Jinrui Futures, the brokerage arm of Jiangxi Copper, estimates.

This would create demand for an extra 2.3 million tonnes per year of copper concentrate at an average grade of 26%.

“The construction cost of a Chinese copper smelter is only one quarter of a Chilean copper smelter. So it makes more sense to see more concentrates being shipped to China for smelting,” Hamilton added.

Intensifying competition for copper concentrates have been reflected in lower TC/RCs, which has caused profit margins at smelters to narrow. This could eventually constrict Chinese production of copper cathodes.

Still, domestic demand for copper cathodes could improve in the second half this year.

“There are some headwinds in air conditioners and in the housing sector but the fundamentals are relatively stable versus 2018. There will be better demand in the second half to justify slightly better refined copper demand growth of 2-3% in 2019,” Widmer said.