China's copper smelting group faces reckoning ahead of quarterly gathering

China’s top copper concentrate buyers are in a fix.

On Thursday July 18, the historically powerful China Smelter Purchase Team (CSPT), which comprises purchasing managers from the country’s 10 top-rated state-backed copper smelters, will gather in Hunchun city for its quarterly meeting.

Traditionally, the forum is an arena for members to share information on trade flows and maintenance schedules, and to set a quarterly purchasing price floor for copper concentrate treatment and refining charges (TCs/RCs), a level that sets a wider tone for the rest of China’s copper smelters, which number more than 40.

This time, however, things could be different.

Last week, the organization’s two principal participants, Jiangxi Copper and Tongling Nonferrous, both agreed half-year contracts with Chilean miner Antofagasta for copper supplies in the first half of 2020, at unexpectedly low terms around mid-$60 per tonne/6 cents per lb.

These unusually early deals sent ripples around the global market but also pointed to fractures within the CSPT and questions about whether it can continue to act as an effective bulwark against rapidly declining spot terms for copper concentrates.

“Now everyone is fighting their own battles, the group is like a pool of loose sand,” Fastmarkets was told ahead of the meeting by a representative from one CSPT-affiliated smelter who declined to be named.

Slim margins
TCs/RCs are discounts on the exchange-traded copper price paid to smelters for the cost of processing concentrates into refined metal. They provide a substantial portion of smelter revenue in addition to premiums, by-products such as sulfuric acid and gold, and free metal.

(Smelters typically pay for 96.5% of the copper they buy in concentrate, but nowadays they can extract as much as 99%, with the resulting “free metal” being considered part of their revenue.)

At $52.5 per tonne/5.25 cents per lb on July 12, the Fastmarkets copper concentrates TC index, cif Asia Pacific, which tracks the mid-point of trader and smelter buying terms for concentrates, had dropped to its lowest recorded level since the assessment was launched in 2013.

Competition could drive consolidation
At these low levels, margins were beginning to look tight for some smelters, and this represented a significant threat to future production.

Smelters in China’s Shandong province, which include Dongyin Fangyuan and Dahai Group, were finding it difficult to open letters of credit to purchase copper concentrates, several market sources with direct knowledge of the issue told Fastmarkets.

Earlier this year, Jiangxi Copper announced a plan to buy a controlling stake in fellow Chinese smelter Yantai Humon Group, another smelter with financial difficulties.

The lower TCs/RCs that will result from the Antofagasta deals could create an opportunity for large state-backed smelters to consolidate China’s sprawling network of copper smelters, according to Colin Hamilton, head of BMO Capital Markets Research.

“I get the feeling that Jiangxi and Tongling are making a play to consolidate, and there’s no better time to do that than on the cheap, with other competitors getting run into the ground,” Hamilton said. “Profitability must be coming into question now.”

BMO cites a breakeven level of TCs/RCs for Chinese smelters at $60 per tonne/6 cents per lb on an operating basis, and $75 per tonne/7.5 cents per lb on an all-in costs basis, including capex requirements. These calculations were based on a higher copper price and premium than were available today, however.

The cash price is currently around $6,000 per tonne on the London Metal Exchange, while the copper grade A cathode premium, cif Shanghai, was assessed around $53-69 per tonne on July 17.

Unity difficulties
Within the CSPT group, cracks are starting to show.

Despite having set a buying level of $73 per tonne/7.3 cents per lb for the third quarter of 2019, smelters in China were currently picking up spot concentrate parcels in the region of $55 per tonne/5.5 cents per lb, according to a survey by Fastmarkets on July 12.

In the third quarter last year, the CSPT failed to agree a purchasing floor despite a clear uptrend in terms, due to falling TCs/RCs.

“Everyone is buying below the price floor these days, so not many deals are being reported to the group. Internal communication is poorer,” a second source within the group said.

A lack of mutual trust across the CSPT could make it difficult to coordinate widespread production cuts with the intent of pushing TCs/RCs up again. No smelter wants to be running at reduced capacity and risk losing market share to another group member or to privately run competitors.

Still, sources close to the unit indicated that simultaneous maintenance outages could be scheduled, similar to the way in which China’s largest zinc smelters worked to combat decade-low zinc treatment charges in 2017.

Today’s challenges
Ultimately, the meeting on July 18 will leave the group with a number of challenges, and at the top of the list will be reaching a mutual agreement.

But this, BMO’s Hamilton said, may be unlikely.

“The mid-size smelters… even the Jinchuans of this world are not going to be overly happy. So will the CSPT survive? Probably nominally, at the moment, but certainly its relevance has been diminished by the deals [with Antofagasta],” he said.

“At the end of the day, they are fighting one another for market share,” he added. “As a purchasing [body] or agglomeration of firms, it’s an agglomeration of competitors.”
 
Julian Luk in London contributed to this report.

Archie Hunter

archie.hunter@fastmarkets.com

Published

Archie Hunter

July 17, 2019

19:25 GMT

London