An unprecedented expansion of Chinese copper smelting capacity has triggered lower concentrate treatment and refining charges (TC/RCs), cathode premiums and sulfuric acid prices, all key sources of smelter revenues.
In a series of deals, copper miner Antofagasta signed contracts with China’s two top smelters with half-year terms locked in the mid-$60s per tonne, close to what were annual benchmark numbers back in 2012.
And along with global macroeconomic uncertainty keeping LME copper prices low, market makers are starting to ponder whether smelters can last out on these slim margins.
"It is more unsustainable even now than it was five or six years ago. The price-cost squeeze for smelters is real and is accelerating," Christophe Koenig, senior vice president for commercial business including procurement at Europe’s largest copper smelting company, Aurubis, said.
Fastmarket’s copper concentrate index, cif Asia Pacific, which tracks spot TC/RCs – discounts to the exchange price paid to smelters for the costs of processing concentrates into refined metal, stood at $52.40 per tonne / 5.24 cents per lb as of Friday July 5, having dropped by 40% since last November 30.
Recent tenders for spot copper concentrates, such as Atlas Mining’s Carmen, have seen traders buying parcels at TC/RCs around $40/4 cents, levels not seen for seven to eight years.
The last time terms for concentrates were this low, copper prices were averaging over $8,000 per tonne. Now they hover around $6,000.
This makes a real difference to copper smelters, who traditionally pay for 96.5% of the total copper in the concentrate they buy, despite being able to recover up to 99%.
“The combination of today’s low terms, which are as low as we’ve seen in some years, with softer prices would make life uncomfortable for some smelters,” Duncan Hobbs, research director at physical trader Concord Resources told Fastmarkets in an interview.
“People should be looking at risks to metal production operating rates and one of the risks is from China Inc,” he said.
Although spot TC/RCs for copper concentrates continue to fall, most smelters will have secured the majority of their tonnages via annual contracts at benchmark terms.
At $80.80/8.08 cents, this means if a smelter procures 20% of their concentrate feed on the spot market at levels currently traded ($60/6 cents) their TC/RCs for the year will be down to $76.64/7.664 cents.
“We all know that with the TC/RCs anywhere near the benchmark there is no greenfield that makes financial sense – this has always been true in the last 15 year already, and it’s still true,” Aurubis' Koenig said.
Already the world’s largest recycler of copper, Aurubis which takes over 35% of its copper raw material from scrap, is currently in the process of buying pure-secondary smelter Metallo for $424 million.
The deal is “an important step in the implementation of the recycling strategy,” Aurubis said at the time.
Smelters selling sulfuric acid at a loss
Adding to the stretched copper smelting margin, low domestic price of sulfuric acid - a byproduct of primary smelting, has also prevented Chinese smelters from diversifying their income sources.
Copper smelters produce around 1 tonne of sulfuric acid for each tonne of copper concentrate consumed. Typically, this sulfuric acid can be sold to refineries that use the solvent extraction-electro winning process to produce cathodes.
However, a significant amount of sulfuric acid is being held back in many areas such as Shandong province where sulfuric acid is only priced at 50 yuan per tonne on an ex-works basis, sources told Fastmarkets. The price in certain Eastern Chinese areas are higher at 200 yuan per tonne.
“At this level, the majority of copper smelters are selling the sulfuric acid at loss,” a major trader source said.
The low domestic price has become the reason for Chinese smelters to sell the sulfuric acid overseas for a better price.
Previously Chinese smelters preferred to sell their acid to domestic clients as the overseas acid shipping cost is high, estimated at $60 per tonne to Chile.
Smelter margins are also being limited by premiums for refined cathodes; while Codelco raised its annual premiums cif China to three-year highs of $98 per tonne, spot levels this year have been sluggish.
At $58.60 per tonne, Fastmarkets’ cif Shanghai copper premium is averaging at its lowest January-July level in the past five years barring 2017.
Chinese refined copper supply growth outpacing demand
Low spot premiums for cathodes come despite expectations that Chinese copper demand will continue to grow consistently, according to International Copper Study Group head of economics Carlos Risopatron.
Assuming the projects to be completed this year and next go ahead, Chinese fabricator capacity expansion is almost 8 million tonnes. The rest of the world is 3 million tonnes, he said.
Still, consistently low prices and scrap discounts should curb further investment in refined production.
“If refined copper prices remain low there will be less scrap refined, this is for sure. The implications of a low price are that this clearly will affect the market and secondly there won’t be more investment in new mines and smelters or refineries,” he said.
Fastmarkets analysts forecast a 4.1% annual increase in Chinese refined production in 2019, which will take refined output to 9.782 million tonnes this year. That beats the 3.1% increase forecast for Chinese demand growth.
"So we think Chinese smelting capacity will increase by about 750,000 tonnes this year overall. That’s made up of new plants starting this year and some additions from last year still ramping up. There’ll be a bigger increase in capacity in 2020," said Senior Metals Analyst Andrew Cole.
One way the market is adapting is consolidation. As well as Aurubis’ purchase of Metallo, Jiangxi Copper announced in March its plans to buy a controlling stake in fellow Chinese smelter Yantai Humon Group.
Similar tie-ups could become more common amid difficulty in obtaining credit among Chinese industrials, but the current rate of expansion and its effect on product premiums and TCs is unsustainable, according to Aurubis.
“That works for one year, for two, but it doesn’t work for a long period. If we continue to see the value chain as separated in different pieces at some point in time we will start to see smelters closing down,” Koenig said.
“Now we see the smelting cost curve in China moving upward because of additional environmental costs, we will see a turning point in the next years, that’s why I believe we are at a juncture,” he added.
Additional reporting by Julian Luk.
Sinking product prices across the copper value chain are eroding processing margins for custom copper smelters, causing uncertainty as well as driving investments and consolidation in the industry.