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Chinese smelters face overcapacity, tightening feedstock

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Smelters may discuss output cuts on March 31, sources say

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Treatment charges for copper concentrate hit record lows

By Amy Lv and Lewis Jackson

BEIJING, March 21 (Reuters) - Major copper smelters

across top consumer China have kicked off equipment maintenance

in March, traditionally a peak demand period, in a bid to stem

losses from a worsening feedstock shortage that is hammering

margins, industry insiders said.

Shutting down plants in what is traditionally one of the

busiest times of the year highlights how much pain the scarcity

of copper concentrate is causing refiners, a problem compounded

by smelting overcapacity that has sparked fierce competition for

the raw material and sent treatment fees below zero.

Roughly 980,000 metric tons of smelting capacity, or 8% of

China's total last year, is set for maintenance in March,

Hongyuan Futures said in a note. Three analysts and a smelter

manager told Reuters this was an unusually high amount compared

to previous years.

Staff at three large smelters confirmed to Reuters they

began equipment maintenance in March. Another operator, Tongling

Nonferrous Metals Group, which accounted for 13.5%

of China's refined copper output in 2023, started month-long

maintenance on some smelting equipment in early March, according

to two sources.

Production cuts can be sensitive in China, where many

smelters are important contributors to regional economies, but

as in many industries, from steel to oil refining, the sector is

plagued by overcapacity as operators chase market share.

The overcapacity in China, the world's largest supplier of

the refined metal used in wiring, machinery and new energy

technologies, is contributing to a global imbalance in the

copper smelting industry.

By shutting equipment for maintenance, smelters hope to cut

consumption of copper concentrate, ease the concentrate

shortfall and stop processing fees from sliding even further,

analysts said.

Eight analysts and smelters who spoke to did so on condition

of anonymity given they are not authorised to speak to media.

Tongling did not respond to Reuters' request for comment.

The industry's difficulties put a spotlight on the March 31

quarterly meeting of the China Smelters Purchase Team (CSPT),

where measures including production cuts are set to be

discussed, sources with knowledge of the matter said.

"There is a significant risk of large-scale output cuts

among Chinese smelters this year," said Patricia Barreto, senior

analyst at S&P Global Commodity Insights.

If Chinese smelters jointly agree a production cut, refined

copper output this year will likely fall, which could lead China

to import more, analysts said.

UNUSUAL TIMING

Widespread maintenance is unusual in March, when smelters

historically benefit from a surge in demand after the Lunar New

Year holiday before undergoing maintenance in April or May.

Supply of copper concentrate has been tight since late 2023

due to disruptions at major mines including First Quantum's

Cobre mine in Panama as well as smelter capacity

expansion.

That overcapacity, which continues to grow, is increasing

demand for globally scarce concentrate.

Analysts at Antaike and Shanghai Metals Market have lowered

forecasts for copper concentrate output growth this year due to

downward revisions from producers, according to research notes

from Citi.

Some smelters are operating at a loss, and not just in

China.

Glencore's ( GLCNF ) Pasar smelter in the Philippines was put

on care and maintenance in February. Japan's smelters, while

bunkering down for tough times, may fare better as they are more

diversified than China's and have long-term supply contracts.

Treatment and refining charges (TC/RCs), a key revenue

source, have been negative since December 20, meaning smelters

must pay miners or traders to turn concentrate into refined

metal, instead of the other way around.

Fastmarkets copper concentrates TC/RC index plunged to a

record low of -$26.5 per ton and -2.65 cents per pound on March

7.

"The situation is much tougher this year, as last year

smelters could make some money thanks to better prices for the

long-term contract, but you are suffering losses in whatever

situation right now," said a manager at a Chinese smelter.

"The only difference is whether you are losing more money or

less money," the manager added, saying losses were as much as

3,000 yuan ($414.47) per ton of refined copper for spot cargoes.

Four analysts estimated losses at between 1,000 yuan and

2,000 yuan per ton.