Chinese copper smelters are struggling with margin collapse

Industry insiders say that major copper smelters in China, the world's largest consumer, have started equipment maintenance during March, traditionally peak demand season, to try and stem the losses caused by a worsening shortage of feedstock, which is hurting margins.

The fact that plants are being shut down during one of the busiest periods of the year shows how much refiners suffer from the lack of copper concentrate. This problem is compounded by the overcapacity in smelting, which has led to fierce competition and pushed treatment fees well below zero.

Hongyuan Futures stated in a report that 980,000 metric tonnes of smelting capability, or 8%, of China's total smelting output last year will be maintained in March. Three analysts and one smelter manager said that this is a high number compared to other years.

Three large smelters have confirmed that they started equipment maintenance in early March. Two sources claim that Tongling Nonferrous Metals Group (which is expected to account for 13.5% China's refined output of copper in 2023) began a month-long overhaul on some smelting machinery in early March.

In China, many smelters contribute to the regional economy. But, as with many other industries, such as steel and oil refining in China, this sector is plagued with overcapacity, as operators compete for market share.

Overcapacity is a major factor in the global copper smelting imbalance. China is the largest producer of refined metals used in wiring and machinery, as well as in new energy technologies.

Analysts said that by shutting down equipment for maintenance, the smelters hoped to reduce consumption of copper concentrate and ease the shortfall in concentrate. They also hoped to stop processing fees from further sliding.

Eight analysts and smelters spoke on the condition of anonymity, as they were not authorized to speak with media.

Tongling has not responded to the request for comment.

Sources with knowledge of this matter say that the industry's problems have brought the quarterly meeting of China Smelters Purchase Team to the forefront. At the meeting, which will take place on March 31, measures such as production cuts are expected to be discussed.

Patricia Barreto is senior analyst for S&P Global Commodity Insights. She said that there was a high risk of large-scale production cuts by Chinese smelters in 2018.

Analysts said that if Chinese smelters agree to a joint production cut this year, the refined copper output will probably fall. This could lead China import more.

UNUSUAL TIMING

It is rare to see widespread maintenance in March. Historically, smelters benefit from an increase in demand following the Lunar New Year before undertaking maintenance in April and May.

The supply of copper concentrate is tight due to the disruptions in major mines, including First Quantum’s Cobre mine located in Panama and increased smelter capacities.

The overcapacity that continues to increase is driving up demand for global concentrates.

According to Citi research notes, Antaike and Shanghai Metals Market analysts have revised their forecasts downwards due to the revisions made by producers.

Not only in China, but also elsewhere some smelters operate at a loss.

In February, Glencore's Pasar Smelter in the Philippines went on maintenance. Japan's smelters may do better than China's, even though they're bunkering up for the tough times. They're more diversified and have longer-term supply agreements.

Since December 20, treatment and refining costs (TC/RCs), which are a major revenue source, are negative. This means that smelters have to pay traders or miners in order to refine concentrate.

Fastmarkets copper concentrats TC/RC Index plunged to a new record low on March 7 of -$26.5 a ton and -2.65c per pound.

The situation has gotten worse this year. Last year, smelters were able to make money due to higher prices on long-term contracts. But you're losing money in any situation, said a Chinese smelter manager.

The manager said that the only difference was whether or not you were losing more or less money. He added that losses could be as high as 3,000 Yuan ($414.47) for each ton of refined cupro for spot cargoes.

Four analysts estimated that losses per ton ranged between 1,000 and 2,000 Yuan.

(source: Reuters)