China rushing to invest in new copper smelting capacity – but where’s the raw material?

A wave of investment is washing across China for the construction of new copper smelting capacity, intensifying the competition to acquire raw materials to feed the rapidly growing number of furnaces, Fastmarkets heard on Thursday May 11

Twelve expansion or construction projects were scheduled for completion from 2023 to 2026, according to a survey conducted by Fastmarkets in April and May this year.

After speaking to dozens of major copper market participants, data showed that there was expected to be a net increase of at least 3.4 million tonnes per year of new copper smelting capacity.

This would be a sizeable expansion, even for China, which is already home to half of the world’s capacity to make copper cathodes.

In 2022, China produced 10.39 million tonnes of refined copper, combining both primary and secondary output, according to the International Copper Study Group (ICSG). China’s own National Bureau of Statistics said that the country produced 11.06 million tonnes of refined copper in the year.

“This will not be the final wave of expansion in China,” an executive with a major state-owned copper producer said. “It’s politically correct to invest in copper – it’s green, the country needs more of it, and the projects are easy to finance. [Copper] is a safe bet.”

The most ambitious plans belong to Tongling Nonferrous, which hopes to have three projects completed by the end of 2025, including its 500,000 tpy copper facility in Anhui. This is expected to be the world’s biggest copper smelter, with capacity surpassing 2 million tpy.

But it is not only existing copper producers that are considering a larger stake in the copper sector. There are some in China’s weakened real estate sector, and in export businesses, that are also seeking to diversify by tapping into the ‘green copper’ space.

Over a period of less than six months, Xiamen C&D emerged as a major figure in the copper sector. It is planning a new 600,000 tpy smelter in Liaoning province, shortly after acquiring Xiangguang’s 450,000 tpy copper facility, and is still looking for projects for further expansion, sources said.

A producer source described the situation vividly as “an explosion in copper smelting capacity” over the next four years.

“[But] the main question will definitely be how Chinese smelters will secure the raw materials to ‘feed their new mouths’,” he added. “There are not many new mines in the pipeline.”

Mouths to feed

A net increase of 3 million tpy of primary copper smelting capacity in China would translate to new demand for roughly 12 million tpy of copper concentrates.

But new furnaces in China will not be the only new mouths to feed.

“When you consider the smelter capacity being built outside China – in the Democratic Republic of Congo, India and Indonesia – overall there will be too much smelting capacity chasing too little concentrate supply,” Andrew Cole, Fastmarkets’ principal analyst for base metals, said.

The forecast rise in mined copper supply will be modest in the period 2023-26. Fastmarkets has forecast world copper concentrates supply to increase by 3.165 million tonnes, to 20.882 million tonnes in 2026 from 17.718 million tonnes in 2022, including an allowance for disruptions. Learn more about the outlook for copper in 2023.

“After 2026, the growth in copper concentrates supply will slow dramatically, averaging only 1.3% per year for the next five years,” Cole added. “That will compare with an average of 3.8% per year in 2023-26, and potentially +7.4% in 2024. So, after 2026 is when things will get really tight. Maybe China’s rush to build new smelters now is intended to secure market share before the worst of that tightness hits the market.”

Proactive

While new smelters in the DRC and Indonesia could rely on those countries’ major domestic copper mines, such as Kamoa Kakula and Grasberg, regions without such upstream assets will have to act fast to win the favor of copper miners.

This competition has already started.

Chinese state-owned smelters were unprecedentedly proactive in this regard at an industry conference in April, Fastmarkets understands, showing interest in financing the construction of copper mines, investing in equity and taking stakes in projects, to secure offtake from miners.

India’s Adani Enterprises, with the first phase of its 500,000 tpy copper facility scheduled to start operations in the second half of 2024, is also working hard to secure concentrates supply.

It recently set up an office in Lima, Peru, and has hired local agents to source concentrates from small-to-major suppliers in Latin America. A number of suppliers have already signed Memorandums of Understanding with Adani.

Refined copper’s dynamics

“China will be producing more refined copper and our need to import cathodes will diminish,” the first producer source said.

The country imported 803,854 tonnes of copper cathodes in the first three months of this year, down by 11.4% year-on-year.

China is the biggest consumer of copper and accounts for 40% of the world’s total copper imports, ICSG data showed.

Shanghai has been the most active spot market for the trade in copper cathodes over the past decade, but trading interest has been lackluster so far this year.

Fastmarkets’ benchmark copper premium reached a record low in February 2023, with its lower end hitting a single digit. But the copper grade A cathode premium, cif Shanghai, has rebounded since then to a range of $35-50 per tonne on May 11.

But this was some way behind the contract level of $140 per tonne set by Chilean copper producer Codelco for Chinese clients.

For a forward-looking view of the base metals market and expert analysis to help inform your trading strategy, visit our base metals price forecasts page today.

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