FOCUS: China's copper smelters struggle to slash output despite demand drop

China's copper smelters face limited scope to slash production even as diminished demand on virus-related lockdowns raises concerns refined inventories could grow.

Daye Nonferrous, based in Huangshi at the heart of the novel coronavirus outbreak in Hubei province, plans to operate at just a moderately reduced rate of 70-80% of capacity for the first quarter, a company source said.
A market source said that Daye Nonferrous' 600,000 tonne-per-year smelter in Huangshi City, Hubei, resumed operations on February 3 following the Lunar New Year holiday (January 24-February 2) despite being under quarantine and transport restrictions.
The move echoes a trend across China's copper industry. Although demand for the metal has slumped on prolonged factory closures, smelters are reticent to incur the costs of more drastic production cuts.
Trucking to the smelter has become slower than usual but Daye is still able to receive copper concentrates shipments via the Yangtze River to Huangshi port, according to a source.
Another Chinese copper smelter, which is a member of the China Smelter Purchase Team (CSPT), told Fastmarkets it will continue with production, reducing daily concentrates input by around 30%.
“Copper smelting is unlikely to be cut significantly, production will be more or less normal in China,” a Chinese trader said.
Meanwhile, the CSPT has not announced any joint plans among its members to cut output so far. The next quarterly meeting will be held at the end of March.
“We didn’t even stop production during Spring Festival,” another CSPT smelter source said.
"As long as the smelters have working capital, they'll try to keep running, consuming raw material, and if metal is not leaving they'll stockpile cathode and hope things get back to normal," Duncan Hobbs, research director at metal trading house Concord Resources, said.
"The very last thing a smelter wants to do from an operational point of view is to stop a plant, it is can be a real expensive headache."
At these rates of operation, expectations are for copper cathode inventories to build up over the coming weeks because copper fabricators remain on extended closures and demand for the metal is limited.
"[The] government has ordered that plants should not reopen which also includes semi-fabricating plants and end-user companies. Physical consumption is therefore virtually dead," specialist copper market consultancy Simon Hunt Strategic Services said in a note to clients February 4.
Demand dive
The logistic and economic gridlock in China caused by the novel coronavirus outbreak is having a heightened impact on copper above many other commodities because the country is by far the largest refined producer and consumer as well as a major net importer of raw materials.
China produced 17.15 million tonnes of copper semi-fabricated products in 2018 - 76% of the world's total, according to the World Bureau of Metal Statistics.
Major copper consumption hubs Guangdong and Zhejiang are also the two provinces with the largest number of verified coronavirus cases behind epicenter Hubei, according to data from China's National Health Commission.
Large-scale copper semi manufacturers Ningbo Jin Tian Copper, Ningbo Jinlong Copper, Golden Dragon, Jiangsu Jiangrun Copper Co and Zhejiang Hailiang Co all have plants that are offline this week, sources with knowledge of the matter told Fastmarkets.
Meanwhile copper processers owned by Amer International Group, processing 250,000 tonnes per year of copper rod in Anhui province, are also unlikely to return soon, a source with direct knowledge of the operations said.
"China is supposed to return to work next Monday [February 10], but that would seem fraught with difficulty. The reopening of schools due on February 17, although nothing has been announced, is not expected by anxious mothers until March 1," John Browning of Shanghai-based futures brokerage Bands Financial said in a note today February 5.
Inventory buildup
With China's logistics networks having ground to a halt, inventories are building up at smelter plants and at the country's sea-ports including Port of Shanghai which handles over 70% of cathode imports for the country.
Several ports have waived extra storage fees to alleviate the financial burden on importers, with the bulk of cargoes not expected to be moved in the coming week.
"There are very few trucks and drivers for them working at the moment,” another copper trader said.
Sulfuric acid warning
The logistics crunch has brought about another question: What to do with the vast quantities of sulfuric acid produced as a byproduct of smelting copper, zinc and lead concentrates, which are predominantly sulfide in base.
Hubei province, now mostly on lockdown, consumes over 20% of domestic sulfuric acid output in China. Its annual consumption is around 20 million tonnes, a local smelter source estimated.
Smelters produce 1 tonne of sulfuric acid in the processing of every tonne of copper concentrates.
“Blocked road transport in Hubei province is an issue as sulfuric acid is transported by tank trucks within China,” the source said.
Sulfuric acid output from some of the biggest copper smelters, including Tongling Nonferrous, China Gold’s Sanmenxia, Jiangxi Copper as well as some smelters from northern China used to be sold to Hubei consumers, mainly producers of fertilizers and chemicals.

Archie Hunter

archie.hunter@fastmarkets.com

Julian Luk

julian.luk@fastmarkets.com

Published

Archie Hunter

Julian Luk

February 05, 2020

15:30 GMT

London