China’s Copper Boom Under Threat as Miners Test Bargaining Power

69{5327wabquqqny0yqiw[n5_media_dl_1.png National Bureau of Statistics

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(Bloomberg) — The unrelenting expansion of Chinese copper processing capacity over the past few years has now become a global headache, as smelters scramble to secure the ore they need to produce the vital industrial metal.

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Output in the world’s top producer of the refined metal has ballooned to a record this year, even in the face of trade tensions wars that are clouding the outlook for demand. The resulting competition has handed bargaining power to some of the world’s largest miners.

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Copper treatment charges, typically a key earner for processors, have plunged deep below zero on the spot market. Chilean miner Antofagasta Plc has proposed negative charges for contracted supplies to smelters in the second half.

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The fraught situation for smelters worldwide is fueling expectations of cuts — Glencore Plc shut a facility in the Philippines in February. It’s also focusing market attention on the surprising resilience of China’s output, and raising the question of how long that can last.

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Analysts and industry executives say China’s output is more resistant to financial pressures because it is now dominated by state-owned producers and by relatively large, efficient and low-cost smelters. Three major new plants were opened just last year, more than offsetting the pain felt by more modest operations. 

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But there’s also a still-substantial segment of China’s market that is made up of smaller, privately owned smelters with more exposure to a tightening spot market. CRU Group says those plants account for about a quarter of the country’s output.

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“Even if you have very deep pockets and are willing to operate at a loss, at the end of the day you might have to cut production because you simply cannot get the copper concentrate,” said Craig Lang, principal analyst at CRU Group. 

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The stakes are high for the global copper smelting industry. With all high-cost facilities facing losses, every ton that resists financial pressure in China means more pain for those elsewhere. 

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Spot treatment charges to process concentrate fell to negative levels in December, and reached minus-$60 a ton last month. The fees are deducted from the cost of concentrate and ordinarily make up a large chunk of smelter revenues. Term supplies are now threatening to slide into negative territory too, meaning smelters are effectively paying more for copper ore than the value of the metal contained in it.

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In February, when fees were less punitive than they are now, Glencore Plc Chief Executive Officer Gary Nagle said he wouldn’t keep open loss-making copper plants. The company mothballed a smelter in the Philippines and is cutting costs at plants in Canada.