Competition for mined copper supplies is expected to intensify, further eroding margins for Chinese firms that produce half the world’s refined copper, but significant output cuts that tighten the metal market are unlikely.
Chinese copper producers, mostly state-owned, are under pressure to maintain or raise production targets to shore up sluggish growth in the world’s second-biggest economy.
Tighter concentrate supplies are due to disruptions such as the closure of First Quantum’s Cobre mine in Panama and Anglo American cutting production guidance.
The scramble to secure supply has meant Chinese smelters have had to accept a cut in treatment charges (TCs), a fee for converting concentrate into refined copper, by nearly a third over the past month, according to data from pricing agency Fastmarkets.
Chinese smelters told Reuters they are considering curbing refined copper production in the second quarter but did not give any detail about the quantities involved.
The squeeze on margins will likely force smaller, higher-cost smelters reliant on spot purchases of concentrate to cut or stop production in the coming months, said analyst Craig Lang at consultancy CRU Group.
TCs “might bottom in the $40s this time… before triggering smelter capacity cuts which will help ease the tightness,” Lang said.
Spot TCs in China tumbled to $48.2 a metric ton on Jan. 5, the lowest since July 2021 and 40% below the annual benchmark of $80 a ton, which dropped for the first time in three years.
TCs are the main source of income for smelters, falling when there is less available copper concentrate or demand is lacklustre and rising when supplies are high.
“Smelters big and small are coming to us for spot cargos for delivery in first and second quarter,” said an official at a major copper mining company.
Another factor behind the drop in TCs is expansion in smelting capacity, implying a bigger appetite for concentrates.
China’s refined copper output surged 13% year-on-year in the first 11 months of 2023 to 11.8 million tons, official data showed.
“Primary smelting capacity is expected to increase by almost 5% this year with key projects in China, Indonesia and India,” said analyst Emily Brugge at consultancy Wood Mackenzie.
(By Siyi Liu, Julian Luk and Mai Nguyen; Editing by Pratima Desai and William Mallard)
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