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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.

(Reporting by Amy Lv and Lewis Jackson in Beijing; Additional reporting by Violet Li in Shanghai, Melanie Burton in Melbourne, Yuka Obayashi in Tokyo and Eric Onstad in London. Editing by Tony Munroe and Shri Navaratnam)