Unlock Editor’s Digest Lock for Free
FT editor Roula Khalaf will select your favorite stories in this weekly newsletter.
Copper smelters are paying record amounts to convert raw concentrates into red metal. China has since tried to dominate the global market through a massive construction programme of processing facilities.
Price reporting group’s First Market data shows that rate smelters were billed to process copper concentrates that expect to successfully achieve healthy margins at normal times, and were negative for most of the year, reaching a record low of $45 per tonne at the end of May.
This means that such industrial facilities are actually paying to handle the concentration to keep their businesses up and running. Analysts warn that it is putting pressure on the viability of many smelters.
“It is likely that there will also be a decline in copper smelter activity and potentially some closures will also be suspended,” said Toralf Haag, chief executive of copper producer Aurubis.
China is trying to establish a dominant position in the basic metals market, while Western countries are trying to break their dependence on Asian countries for these products.
Copper is one of the key minerals needed for many key sectors, including energy, technology and electric vehicles, and China has expanded its copper smelting capacity even in the face of a shortage of concentrates supplied to its facilities.
Product Trader Glencore in March said it had stopped operations at the Pasar Smelter in the Philippines and cited “increasingly challenging market conditions.”
Product Analysis Group CRU said last week that downward pressure on charges for processing copper concentrates has been exacerbated by the ongoing commissioning of new Chinese smelters.
Smelters expect to make money by purchasing raw materials at spot prices and long-term contracts, and usually processing concentrates at a fee. They also make money by selling additional metals such as gold that can be extracted from the ingredients.
The calculated “fee” high-speed market is actually a discount to the raw materials payments by Xiaoki steel manufacturers compared to the London copper prices, but that discount has been changed to premium this year. The de facto fees have recently risen to a slightly minus $43.25, but are still close to record lows as smelter overpower and lack of concentrates weigh on the market.
Despite London’s copper prices hitting a record high of around $11,000 per tonne last year, there is a negative charge. On Monday it traded at around $9,700 per tonne, and this year it temporarily won $10,000 amid concerns about a shortage. Global demand is expected to exceed supply by 30% by 2035, according to the International Energy Agency.
The smelter is in negotiations with miners on long-term Concentrate contracts, and analysts warn that benchmark processing fees for these contracts could become negative for the first time.
Such results could be “eventually a game changer that forces a meaningful smelting capacity reduction,” said Andrew Cole, principal analyst for base metals at Fastmarkets.
“We’re looking forward to seeing you get the most out of our business,” said Albert Mackenzie, copper analyst at Benchmark Mineral Intelligence.
It “will challenge the economy of many smelters around the world,” he said.
“The enrichment market is expected to become even tougher next year,” he added, so some smelters may not be able to source sufficient feed regardless of price.
Analysts said that in order for the enrichment market to be less pressured, the mines will need to produce more or reduce the global smelting capacity.
Cole said: “There are few indications that the market is bottoming out.”
The prices that the smelter was paying had been somewhat stable in recent weeks, but “traders are still actively shopping,” he added.
