Low margins force private Chinese copper smelters to close while state firms keep growing

Five private copper smelters in China have halted production because processing at market terms has become unfeasible due to a combination of weakening demand for end products, a tight copper concentrates market and the higher costs of complying with pollution standards.

The smelters involved are Top-Eastern Copper in Liaoning, Jinshui Copper and Kaitong Group in Yunnan, Laizhou Fangtai in Shandong, and Zhongqi Copper in Xinjiang.

All of these process copper scrap and concentrates, typically to produce blister copper of 98-99% copper content, which is an intermediate product used in cathode production.

The five smelters have combined primary smelting capacity for 375,000 tonnes per year of blister copper, according to data seen by Fastmarkets.

This is roughly equivalent to processing capacity for 1.5 million tpy of copper concentrates. Nonetheless, the operations have been running at reduced capacity this year.

The closures came at a time when key sources of smelter revenue – such as concentrate treatment charges (TCs), copper prices, cathode premiums and sulfuric acid prices – were at multi-year lows, putting further strain on margins.

“The big smelters might achieve a TC level [in the range] of $50s [per tonne] but we could only get $40s [per tonne]. Small smelters like us are facing very tough times,” a source familiar with a closed operation said.

In late August, Fastmarkets’ copper concentrates TC index, cif Asia Pacific, dropped to $49.20 per tonne/4.92 cents per lb, the lowest level since it was launched in 2013, before rebounding slightly in the past few weeks. It was assessed on Friday September 20 at $50.8 per tonne/5.08 cents per lb.

The capacity taken off the market was small compared with China’s total copper production of 8.9 million tonnes in 2018.

Nevertheless, the shutdowns show how copper processors are being squeezed between weaker global demand for copper and a concentrates market in which market terms are at their least favorable for buyers in more than five years.

The closures, particularly among small-scale smelters, could be the start of a longer-term trend, BMO Capital Markets’ director of commodities research, Colin Hamilton, told Fastmarkets.

“They’re now looking at a period when TCs are going to be low for a while, and for the big guys to settle at that level is pointing the smaller guys into a lower market,” Hamilton said. “Less-efficient smelters will be struggling where we are on a spot [market] basis.”

Despite this, China’s stricter anti-pollution policy has set a higher barrier for the smelting business. For instance, Kaitong was fined by the Yunnan regional government for improper treatment of dust and sewage that contained metals, according to an official statement in May 2019.

For some observers, the struggles faced by such private firms was an example of a contradictory rhetoric for the Chinese copper industry, given that smelters operated by state-owned enterprises (SOEs) carried on with ambitious expansion plans despite adverse market conditions.

Contrast to expansion of state-owned smelters
Daye Nonferrous, one of China’s largest copper smelters, recently decided to go ahead with construction of a 400,000-tpy ‘double flash’ smelter, scheduled to be complete by the end of 2020.

The Daye construction will be the latest addition to copper-smelting capacity since the debuts of Chinalco’s 400,000-tpy Ningde smelter and 400,000-tpy Chifeng smelter, and Guangxi’s 300,000-tpy Nanguo facility, which all commenced operations in the past 12 months.

The ambitious expansion of SOEs and the shrinking businesses of their smaller peers, a de-facto industry consolidation, is already taking place. The increased presence of large operations, which are more likely to procure material from overseas, could mean a growing appetite in China for imported copper concentrates.

In July this year, at least four months earlier than was expected, Chilean copper miner Antofagasta agreed a concentrate supply deal with China’s two largest copper smelters, Jiangxi Copper and Tongling Nonferrous, as Fastmarkets reported at the time.

The unusually early deal pointed to the rising bargaining power of sellers at a time of tight supply expectation.

Antofagasta signed for parts of next year with the TCs paid to smelters for the processing of concentrates set at $65-68 per tonne/6.5-6.8 cents per lb in China and Japan. This was significantly lower than last year’s benchmark price of $80.8 per tonne/8.08 cents per lb.

Top-Eastern Copper, Jinshui Copper, Kaitong Group, Laizhou Fangtai and Zhongqi Copper did not respond to Fastmarkets’ requests for official comment at the time of publication.

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