LME WEEK 2016: Tolling and trading enable China’s copper smelters to balance the market

Copper cathode exports from China have reached historical highs in 2016, powered by the government’s decision almost eight years ago to resume issuing copper concentrate tolling licences and thus facilitate the import of raw material and the export of metal.

A more flexible trade strategy by Chinese smelters, copper market surpluses and rising domestic smelting capacities have given China the power to control the balance between the domestic and overseas red metal market.

Customs data show China exported 363,141 tonnes of copper cathode during the first nine months of this year, a 126.8% year-on-year surge – the highest-ever level in its export history. Exports in May reached its highest level since May 2012, at 84,959 tonnes.

Cargoes were mainly shipped to destinations where the London Metal Exchange has warehouses, including South Korea, Malaysia, Taiwan and Singapore.

Lower Shanghai copper premiums and attractive incentives offered by foreign warehousing companies are the driving forces behind China’s high copper exports.

Average copper premiums assessed by Metal Bulletin for the first three quarters were about $60 per tonne, while incentives at overseas sheds have been as high as $60-65 per tonne this year.

As capacity increases and technology improves at China’s smelters, exporters are becoming more adept at managing their business rapidly and efficiently.

Tolling licence issuance resumes
China resumed the issuing of copper concentrate tolling licences in February 2009, after smelters led by Jiangxi Copper applied to China’s Ministry of Commence to step up their exports. The move was a bid to improve the arbitrage window between far higher prices in London than those in Shanghai, which caused big losses for smelters importing copper concentrate.

Smelters that hold tolling licences avoid China’s 17% value-added tax on concentrate imports and 15% tax on refined metal exports, which means that exporting incurs almost no extra costs.

The first seven smelters to be granted such licences were Jiangxi Copper, Tongling Nonferrous, Yunnan Copper, Daye Nonferrous, Jinchuan Group, Baiyin Nonferrous and Shandong Xiangguang.

Compared with the situation eight years ago, it is no longer difficult for smelters – including privately owned companies – to obtain copper concentrate tolling licences.

“The procedure takes time, but every smelter that meets the environmental regulations has the right to apply for [a licence],” one Chinese smelter source said.

This year, a total of 13 smelters, including Jinchuan Fangchenggang, Dongying Fangyuan, Zijin Mining and Fuchunjiang, secured copper concentrate tolling licences.

When the licences were first issued eight years ago, China’s limited smelting capacity and domestic copper market deficit meant Chinese smelters’ export volumes had little impact on the global market, either in terms of copper stocks or trade flows.

However, China’s rising smelting capacities and sufficient copper supply mean that this year it has been more favourable for China to export copper cathode.

“Theoretically, there is still a copper shortage in China, though demand from other regions are underperforming even more, [so] most copper continues to be shipped here,” a source at one smelter that exports under a tolling licence said.

“So it’s not a tough decision for us. We decide whether or not to export just based on the arbitrage calculation,” he said.

For some smelters near ports, freight costs can be even lower than the costs incurred from selling domestically. In terms of export volumes, smelters with a licence are allowed to export 20-30% of the copper concentrate import volume they handled in the previous year.

As copper is scarce in China and is viewed as a strategic resource, eight years ago exporting big volumes in a short timeframe was difficult. But rising domestic capacities during the past several years is making it possible.

More than 630,000 tonnes of copper have been delivered onto the exchange so far in 2016, predominantly into warehouses in Asia, as Chinese smelters have worked alongside traders such as Trafigura to export cathode under tolling licences.

Cathode imports slow as concentrate rises
Chinese demand for copper is shifting from cathode imports to concentrate imports, which also explains the slowdown in China’s cathode imports and jump in imports of concentrate over the past two years.

During the first three quarters of this year, China’s cathode imports rose 9.41% year-on-year to 2.8 million tonnes. Meanwhile, copper concentrate imports surged by 33% on an annual basis to 12.3 million tonnes.

Aggressive investment from miners ten years ago, when copper was a boom market, led to dozens of copper projects being built, and these have started to go online in recent years. The red metal has also suffered from a surplus because while China has been the largest copper consumer, its economic growth has slowed and there has been a focus on economic restructuring.

The global mark is lacking growth in consumption and continues to rely heavily on China. Half of the copper shipped around the world heads to China as it is even harder to find buyers for the material outside of the country.

China’s sufficient supply of the red metal also means that the country’s smelters can more readily modify their business models.

Metal Bulletin has recently learned that a number of Chinese smelters with tolling licences are applying to become LME-registered brands, which suggests they are preparing export strategies, and in turn that China’s copper export market is likely to show consistent liquidity in the years ahead.

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