In the first half of this year, spot TC/RC’s have fallen fast and to a lower level than most market players expected. The sharp fall in terms suggests that the market is already tighter than would be expected, given the ongoing large smelter disruptions.
A combination of factors can explain this, including less contractual tonnage booked for H1 2019, traders building up their books, production not reaching market immediately and being stockpiled for various reasons, and also the higher availability of high arsenic material, which increases the demand for clean concentrates for blending.
However, it is ultimately the wave of new smelting capacity in China which is starting to have an impact on the market, with concentrate imports shooting up towards 2.0 M dmt/month during the first quarter. In this Insight, we provide an updated view of this dominant factor in the copper concentrates market.
Impact of smelter disruptions offset by new Chinese smelting capacity
Smelter production grew by 3.5% in 2018 to 17.76 Mt blister copper, driven chiefly by increased production from Chinese smelters and projects, which offset the impact of disruptions at Tuticorin and PASAR. South Korea, Japan, Chile and the USA also saw increased production in 2018.
This year, we estimate that global blister production will grow by a modest 0.5% to reach 18.67 Mt. Chinese smelter projects—recently commissioned and those due to start-up this year—are expected to add over 500,000 t of production in 2019, which will offset the impact of lingering disruptions in India and the Philippines, while also making up lost production from Codelco’s extended smelter outages in Chile, reduced production from Zambia, and the widespread smelter maintenance closures which will take place, particularly in Q2 and Q4 of this year.
With 2020 expected to bring the end of key smelter disruptions and the new Chinese capacity ramping up, demand for concentrates is expected to accelerate.
Chinese smelter projects starting-up with some issues
Chinese smelter projects drove the increase in global smelting capacity last year, and this trend is set to continue into 2019. Chinese capacity is expanding rapidly; however, a number of the new projects faced and are facing issues during ramp-up. Additionally, the smelter projects face varying challenges, and vulnerable projects are likely to face more delays.
Three new smelters, Ningde, Xining and Lingbao commissioned during 2018. Chinalco’s 400,000 t/y Ningde, which started producing anodes in September 2018, has overcome some technical issues related to the automation of the plant, the boiler and air blasting system. With these issues being resolved, production at the smelter should be stabilizing, and we understand that the smelter has been considering sulphuric acid exports given that the regional acid market is small.
Lingbao, which started production in October 2018 is running well. The smelter was built by gold mining companies and is focusing on gold recovery. The smelter is designed to operate using low copper grade concentrates; currently their blended copper grade is 18%, and they are feeding the furnace at a rate of 2,000 dmt a day.
Qinghai Xining has had to overcome technical issues since it commissioned in October 2018. Complex concentrate feed quality (including Ashele, with high arsenic) caused problems for the smelter initially, and it is currently stabilizing its production. We understand that the smelter is operating at feed rates of 1,200-1,300 dmt/d, up from 700-800 dmt/d initially.
This year, it seems that the drop in annual benchmark TC/RCs failed to dissuade new projects being brought online. However, with sharp declines in spot TC/RCs (terms fell by almost $30 /t in the first four months of 2019), we expect to see some plants tested financially.
Nanguo started-up on the 10th of April; however, we understand that the smelter has been suspended for emergency repairs due to technical issues. Initial rumours suggested that complex concentrates feed caused overheating of the blister furnace which damaged the lining. Blister production should be down for at least 30 days, but refined production is said to continue using blister from the custom market, which could be a reason why domestic blister RCs dropped sharply from $175/t to around $160/t this month. Other sources claim that the issue was not the use of complex feed but a leaking boiler, an issue which can be resolved much more quickly. In terms of concentrates feed, the smelter has secured 400,000 dmt for the year and has 100,000 dmt stockpiled at the plant.
The first 200,000 t/y production line of Yunnan Copper’s Chifeng Jinfeng project was initially expected to start-up on the 19th of April. Reports indicate that the company has already warmed up the new furnace; however, there have also been reports of at least one month of force majeure impacting the smelter’s old furnace from early May due to acid system problems. The new 200,000 t/y second line is scheduled for September 2019.
Chifeng Jinfeng benefits from a geographical advantage, as the region is close to the China-Mongolia border and not that far from Jinzhou port, which gives the smelter strong flexibility in buying copper concentrate, while transportation costs to ship raw materials are much lower. However, it remains a question whether Yunnan Copper is capable of sourcing such a big volume of additional concentrates in a short period of time, considering the company is not historically a large copper smelter (which suggest that it might not have established strong long-term relationships with large global miners).
The Baiyin Phase II project has a small delay from their original timeline of late-April and is now expected to start up in late-May, while Zijin’s Qiqihaer is scheduled to complete construction in September 2019. Qiqihaer is designed to service the Duobaoshan mine in Heilongjiang province and may have less exposure to the custom concentrates market after the Duobaoshan Phase II mine project reaches its full capacity of 80,000 t/y copper.
Other important news to the market is the 400,000 t/y new copper smelter by Daye. It seems that this project is quite certain, with all environmental permits at hand, but has been seldom talked about in the market. We understand that the old Ausmelt furnace has not been doing a great job in terms of profitability and thus Daye does need a replacement project. Interestingly, Daye is facing declining concentrate productions from its mines, its resources are being depleted and the company has seen limited M&A activity overseas. Therefore, securing enough feed for this project could be a potential challenge if the old Ausmelt remains running at the same time. The latest we have heard about this project is that it might start construction in late-2019 and come online in the next couple of years.
Other projects could be completed during the outlook. Chifeng Jinjian’s new smelter is under construction, with the first phase expected in 2020. The project’s second phase is more uncertain. Probable projects, such as Zhongtiaoshan’s Houma smelter are equally uncertain. Houma does not have access to integrated mine supply and is not located in a region endowed with copper resources. However, the latest intelligence on the project is that paving of the ground has already started. With all administrative procedures and working capital in place, it will take another 12 or even 15 months before the smelter starts-up.
We have seen an increase in M&A activity in the Chinese smelting sector. The most important recent development is Jiangxi Copper’s acquisition of Yantai Guorun smelter and of Humon smelter, both located in Yantai city, Shandong province. These two acquisitions are purportedly made on a call by the provincial government for Jiangxi Copper to double its cathode production between 2018 and 2020. Interestingly, Jiangxi Copper might need another acquisition to reach this goal or, alternatively through expansions at its existing smelting businesses. This could be the reason why Guorun is planning to build another 180,000t refining house late next year and a blister furnace of same capacity in early 2022.
Market expected to tighten as the year progresses
Although we expect to see a mild deficit this year, it will be a tale of two contrasting halves, with a surplus in H1 and a growing deficit in H2. Spot terms continue to fall and are now at levels not seen in years in a market expected to tighten even further in 2020. Hence, we expect market conditions to limit smelter utilization rates and even prompt smelters to start closing operations and cancelling projects.
CRU provides more detailed analysis of the market implications of these events, as well as forecasts for copper mining costs, projects, supply, demand and prices, in the following services:
- Copper Mining Cost Service - Asset by asset cost benchmarking and evaluation tool
- Copper Long Term Market Outlook - Outlook to 2035 for supply, demand, projects and prices
- Copper Market Outlook - 5 year forecasts for supply, demand, trade and prices
- Copper Concentrates Market Outlook - 5 year forecasts for copper concentrates and TC/RC's
If you would like to speak to CRU's team in your region about how our services can support you and your colleagues in your market activity, please let us know and we will be delighted to discuss further with you.
