Figure 1: Trends in Domestic and International Copper Prices; Source: Yide Nonferrous Metals

Figure 2: Shanghai Materials & Trade Copper Premium/Discount; Source: Yide Nonferrous Metals

Table 1: Copper Mining Cycle; Data Source: Yide Nonferrous Metals, Compiled by the Author

Data from research institutions also corroborate this view. According to CRU data, virtually no large-scale copper mining projects were launched in 2017. With the commissioning of major mines—led by Las Bambas—during the 2014-2016 period, this round of copper mine expansion has essentially come to an end. Among global large-scale copper mines, only Rio Tinto and BHP currently have expansion plans; however, it will still take three to four years before these projects begin production. In the short term, the focus will primarily be on expanding existing mines—for instance, BHP’s Escondida mine, which is expected to see significant production growth in 2018. Nevertheless, Escondida mine faces a new round of contract renewal negotiations in June 2018, leaving it uncertain whether its expansion will proceed as planned.

Table 2: Copper Mining Project Overview; Source: Yide Nonferrous Metals, CICC, Woodmac

Figure 3: Global Copper Mine Capacity Outlook; Source: Yide Nonferrous Metals, CICC, Woodmac

Figure 4: Actual Disruption Rate of Global Copper Mines; Source: Yide Nonferrous Metals, Macquarie

From the perspective of the entire industrial chain, crude copper smelting capacity constrains both copper ore demand and the supply of crude copper, while refined copper smelting capacity constrains both crude copper demand and the supply of refined copper. Therefore, we’ll first examine crude smelting capacity. In 2017, crude smelting capacity stood at 22.026 million tons. Most of the world’s newly added smelting capacity has been concentrated in China. Considering that it takes time from construction to actual full-scale production, we estimate that an additional 400,000 tons of crude smelting capacity will come online in 2018, bringing total crude smelting capacity for 2018 to 22.426 million tons. Historically, capacity utilization has been around 84%. However, taking into account China’s restrictions on importing scrap copper of Category 7, we set the capacity utilization rate at 87%. Consequently, crude copper production in 2018 is estimated to be approximately 19.51 million tons. Copper ore supply remains relatively balanced.

Table 3: Organization of the Newly Established Crude Refining Project, Source: Yide Nonferrous Metals SMM

The entire smelting process is merely a processing stage, for which a processing fee (TC/RC) is charged; mines thus retain greater bargaining power. The bottleneck in smelting capacity has led to an oversupply of copper ore, keeping long-term processing fees at high levels for several years. However, the pace of capacity expansion on the mine side has been slowing down, and this trend has become clearly reflected in processing fees (TC/RC). After reaching a peak in 2015, processing fees began to decline. At the Asia Copper Week held in Shanghai, miners and smelters showed significant disagreement over the supply-and-demand outlook for copper concentrate over the coming year. Smelters, represented by CSPT, are hoping for a TC around USD 90 per ton, while miners would prefer an agreement at or even below USD 80 per ton. Based on our analysis, mines appear overly optimistic; setting the TC in the range of USD 85–90 would be more reasonable.

Figure 5: Estimated Crude Refining Capacity, Source: Yide Nonferrous Metals ICSG

Figure 6: Annual Long-Term TC, Source: Yide Nonferrous Metals, compiled by the author

2

Global Refined Copper Market Analysis

In terms of smelting capacity, stimulated by high processing fees, smelting capacity continues to expand. According to currently available statistics from China, 300,000 tons of refined copper capacity was brought online in the second half of 2017, and an additional 1.45 million tons of refined copper capacity is expected to come online in 2018. If copper prices continue to rebound, coupled with persistently high processing fees, this additional capacity could be fully released over the next two years.

Table 4: New Smelting Capacity Added in China, 2017–2018 Source: Yide Nonferrous Metals SMM

The output of refined copper primarily depends on the comparison between processing fees (TC/RC) and smelting costs. Below, we’ll focus on analyzing smelting costs and processing fees, using domestic smelters as an example. In the preceding section, we projected that the TC would be set at a level between 85 and 90; taking the midpoint value of 87.5 for our calculation, we’ll determine the comprehensive processing fee. We’ll use an RMB exchange rate of 6.7, a deduction rate of 1%, and a copper concentrate grade of 30%. Based on these assumptions, we calculate that the comprehensive processing fee for smelting enterprises is approximately 3,800 yuan per ton.

Table 5: Comprehensive Processing Fee Calculation, Source: Yide Nonferrous

Figure 7: Seasonality of Refined Copper Production Source: Yide Nonferrous

Figure 8: Newly Added Refining Capacity, 2017-2019 Source: Yide Nonferrous Metals ICSG

Chart 9: Premium for Long-term Trade, Source: Yide Nonferrous Metals, compiled by the author

Chart 10: Cumulative Year-on-Year Imports for 2017 Source: Yide Nonferrous

In 2017, the cumulative year-on-year decline in copper concentrate shipments plummeted to 2.5%, driven by frequent disruptions at overseas mines that led to lower processing fees, ample copper ore inventories at smelters, and consequently, a slowdown in copper ore imports. Refined copper imports, however, surged significantly: as of October, cumulative refined copper imports increased by 31.73% year-on-year. Since the beginning of this year, import windows have opened frequently, and with favorable interest rate spreads and exchange rate differentials, the volume of financed copper remains relatively high. Although letters of credit have become tighter, many companies continue to engage in financing operations. Anode copper and copper alloys both account for relatively small volumes and will not be discussed in detail here.

Figure 11: Interest Rate Spread and Exchange Rate Spread Source: Yide Nonferrous

Chart 12: Trend of the refined-to-waste price spread, Source: Yide Nonferrous

Let me highlight the issue of scrap copper: Starting from 2018, trading companies will no longer be eligible to act as agents for importing scrap copper. Under the new policy, the entities listed on domestic consignee certificates must now align with the end-users, and the importers and end-users specified in import licenses must also be identical. Following the implementation of this policy, only those enterprises holding both domestic consignee certificates and import licenses—or dismantling enterprises—will be authorized to import scrap copper. As a result, trading companies will lose their eligibility to import scrap copper. Furthermore, stringent requirements have been set regarding the proportion of other impurities (including wood waste, waste paper, waste plastics, waste rubber, waste glass, and other types of waste) allowed in scrap nonferrous metals. According to analysis, the actual threshold will likely be set at 1%, which means that imports of scrap copper classified as “Category Six” and “Category Seven” will be significantly affected.

Figure 13: Copper Consumption by Region, Source: Yide Research on Nonferrous Metals