EXCLUSIVE: China’s biggest private copper smelter files for bankruptcy

China’s largest privately owned copper smelter, Dongying Fangyuan, has filed for bankruptcy, kicking off a debt-restructuring process, multiple sources claimed to Fastmarkets.

Dongying Fangyuan Nonferrous Metals Co Ltd and linked trading entity Dongying Lufang Metals Material Co both filed bankruptcy applications late in July, five sources told Fastmarkets.

Chinese courts are not obliged to make public any information related to the bankruptcy of privately owned enterprises in the country.

The move initiates a restructuring of the Dongying Fangyuan smelting and refining assets in Shandong province, paving the way for joint management by Shandong’s provincial government, state-owned trading company Xiamen ITG and other as-yet unverified parties, according to three sources with direct knowledge of the matter.

Several business partners of the company told Fastmarkets they had been asked to settle transactions with new entities, although the bankruptcy measures have not yet been finalized, they said.

Dongying Fangyuan has yet to respond to detailed requests for comment first made on Thursday August 12. Xiamen ITG and Shandong’s finance ministry have yet to respond to phoned and emailed requests for comment first made on Tuesday August 17. Requests, unanswered, were filed again to the three parties on Thursday August 19.

Operations at Dongying Fangyuan are likely to continue albeit at a reduced capacity, with the Shandong government keen to maintain employment, a source close to the government said. The company has 3,200 employees, according to its website.

One of the company’s two smelters is running at a very low level using minimal volumes of copper concentrate as feedstock, while its refining unit is operating at less than half of its capacity using scrap and blister as feed. It is smelting around 10,000 tonnes per month of copper; its refinery is operating at a higher rate of 300,000 tonnes per year (or 25,000 tpm) of copper cathodes using third-party material, two sources that have recently conducted business directly with Fangyuan claimed.

The company produced 748,000 tonnes of copper in 2018, making it China’s fourth-largest copper producer.

To keep the furnace running, access to credit to pay for raw materials is critical, especially given record highs in copper prices in 2021. This year’s LME cash price average of $9,163 per tonne compares with the average of $5,952 per tonne of the previous five years, meaning buyers of the metal must utilize a greater proportion of their credit facilities than they had previously.

Dongying Fangyuan announced on July 8 a co-operation agreement with Xiamen ITG. Sources with knowledge of the situation told Fastmarkets that, under the terms of this deal, ITG will finance raw material purchases made by Fangyuan and sell cathode produced at the smelter-refiner as part of an offtake deal. Details of that deal were previously reported by Reuters.

Limits and lawsuits
The bankruptcy filing was not unexpected because Dongying Fangyuan and its affiliates have, in recent years, faced a freeze on its assets, limited access to credit lines and raw materials, and lawsuits from foreign and local creditors.

As a rare private operator in the state-dominated sector, Dongying Fangyuan was once a major Chinese importer of copper scrap and copper concentrate. Although its operational capacity had been limited by tight credit lines in the past few years, it remained influential.

In 2019, Fastmarkets broke the news of the Chinese government’s plan to redefine Chinese copper scrap specifications. Fangyuan was one of the 10 companies involved in drafting the new standards, which were regarded as a gamechanger in the multi-billion-dollar copper scrap industry.

Dongying Fangyuan’s oxygen-enriched bottom-blown smelting technology, which can reduce energy consumption rates by around one-third compared with traditional flash smelting, is also well-known in the industry.

The green technology was subsequently tapped by its Chilean state-run operator, Empresa Nacional de Minería (Enami), to improve the recovery of copper from ores and reduce emissions in the planning and development of its new facility at Paipote, in an attempt to comply with Chile’s Supreme Decree 28.

While a search for buyers willing to take a partial stake in the company was considered as a possible way of replenishing its funds a year ago, the process was never concluded.

Late last year, Dongying Fangyuan was hit by a wave of lawsuits from more than a dozen traders, Chinese banks and international banks, made at different provincial and city-level courts in China because of contractual disputes and unpaid debts.

The banks included China Development Bank, Bank of China, Everbright Bank, Bank of Communications, Citic Bank and Agricultural Development Bank of China; non-Chinese banks on the list include Malaysia’s Maybank and the Netherlands’ ABN Amro.

ABN Amro, which in March 2020 sued Dongying Fangyuan for more than $40 million in unreturned credit lines, subsequently announced the closure of its commodity financing businesses. The Dutch lender has one of the biggest exposures to Dongying Fangyuan; Fastmarkets is not aware of a settlement being reached in the case.

Cross-guarantee deals
As was routine in the region several years ago, Dongying Fangyuan, one of the biggest private industrial enterprises in Shandong, made cross-guarantee agreements to help neighboring enterprises in the capital-intensive metals sector to access credit lines.

Unlike state-owned enterprises, private firms in China must clear a higher bar to attain bank loans, which can involve providing substantial collateral, getting guarantees from other major enterprises or relying on reciprocal guarantees with other firms.

While cross-guarantee agreements have helped multiple non-state enterprises get access to credit at cheaper costs, the interdependence made bad loans contagious when the financial conditions of a few participants deteriorated in the industrial hub of Shandong.

As of the end of 2018, Dongying Fangyuan had guaranteed bank loans worth of $926.7 million yuan ($143.2 million) for nine Shandong-based companies, according to a Shanghai Stock Exchange document.

Guaranteed companies included Haike Chemical, Shandong Dahai, Shengli Oil Field, Heze Guangyuan and Jinmao Aluminium have all since filed for bankruptcy.

In April 2021, Dongying Fangyuan was ordered by the Qingdao Intermediate People’s Court to pay 100 million yuan ($15.4 million) to Minsheng Bank as the guarantor of loans for bankrupt copper fabricator Tian Yuan - also based in Dongying city - according to court document "(2020) Lu 02 Civil No 2195.”

The same court ruled that Shengli’s property assets, located next to Dongying government buildings, be put up for auction in an attempt to cash out and repay Dongying Fangyuan. But the auction was twice called off in 2020 and the property was eventually transferred directly to Dongying Fangyuan at a value of 30 million yuan, according to a ruling in March 2021.

According to a Shanghai Securities Exchange filing, Dongying Fangyuan is 71.39% owned by Dongying Development Zone Fangyuan Nonferrous Metals Industrial & Trading Co, which in turn was 74.3% owned by company founder Cui Zhixiang as of August 2019.

The self-made billionaire, who made Forbes’ China rich list for several years, has been restricted from playing golf, living in a luxury hotel and flying first-class, according to a Dongying Intermediate People’s Court restriction order issued on June 29, 2020.

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