December 2021
China’s electricity generation has been hampered in recent months by tight coal supplies, surging coal prices, and toughening emissions standards. China has been unable to buy coal from Australia due to an import ban, while supplies from its biggest supplier, Indonesia, have been impacted by persistent rainfall.

Rail and port constraints have also affected imports from Russia, and China has struggled to boost its own coal production after tougher safety measures were introduced to tackle a rise in deadly accidents. China's coal prices have risen around 96% on tight supplies and on strong electricity demand driven by China’s economic recovery.

However, Chinese regulators have not let utilities raise rates enough to cover the rising costs, so they have been leery to operate their power plants for more hours, with some closing for maintenance, leading to power shortages. Coal-fired power accounts for around 70% of China’s electricity. Meanwhile, hydropower generation has also been hit by a severe drought.

China’s energy crunch has also been spurred by environmental restrictions linked to Beijing's decarbonisation goals. The Chinese government started capping electricity consumption for energy-intensive industries, such as aluminium and steel production, earlier in 2021. Its National Development and Reform Commission in mid-August flagged 20 provinces or regions which failed to meet targets for reducing energy intensity over the first half of this year.

This prompted local governments to take action. More than 10 provinces or regions ordered power rationing, including Guangxi, Jiangsu, Zhejiang, Shandong and Yunnan, where a number of major copper smelters and downstream fabricators are located. Power rationing is likely to have had a less significant impact on smelters than on fabricators. Some smelters in these regions brought forward their planned maintenance into September or October.

According to a Shanghai Metals Market survey, China’s copper cathode production decreased for the second straight month in October to 789.4kt, falling 1.7% month on month and 3.9% year on year. China’s National Bureau of Statistics also reported a 0.3% month on month decrease in refined copper output to 855kt in October.

Zijin Mining reported that its refined copper production from smelters decreased for two consecutive months, totalling 151kt in the September quarter, down from 154kt in June quarter and 161kt in March quarter. Baiyin Copper in Gansu produced 36.7kt in September quarter, down 31% from 52.9kt in June quarter and 10% from the 40.7kt recorded in the same period of last year.   

So far, the Chinese government has not introduced stricter policies, which will see power rationing easing in the remainder of 2021. Nevertheless, smelters in Jiangsu province will operate at 60-70% of full capacity over this period due to ongoing power rationing. Smelters in Guangxi province have finished maintenance and resumed operations, but accidents have slowed down their ramp-ups.  

China’s full-year refined copper supply is forecast to increase by a moderate 4.4% this year to 10,462kt and to further increase 13.7% to 11,891kt in 2022.

Copper Intermediates and Scrap Shortages

Although power rationing is easing, some smelters are running at low capacities due to a shortage of feeding materials, including copper intermediates and copper scrap. Shipments from Africa have been impacted by a global shortage of container shipping capacity, as well as by port congestion in South Africa’s Durban, Namibia’s Walvis Bay and Tanzania’s Dar Es Salaam.

A large number of planned shipments have consequently been delayed. These logistical challenges are expected to continue into next year. First Quantum, a major copper producer in Zambia, has reported that its several shipments planned for the September quarter have been rolled into the December quarter.

China's imports of copper scrap rebounded this year after the high-grade recyclables were reclassified as a "resource' in November last year following tightened restrictions over 2018-2020. Despite this, scrap supply remains tight, hampering smelters’ production. Wuzhou Jinsheng secondary smelter in Guangxi in China is an example. It was put on care and maintenance between 2015 and 2017 due to low availability of copper scrap and intermediates.

Since it resumed production in 2018, it has still been running at below 50% of its designed capacity of 300ktpa. It produced 130kt of copper cathode last year and 78kt in the first half of this year.

China's tight supply of copper scrap is expected to be further intensified by scrap import restrictions in Indonesia and Malaysia. Indonesia’s new impurities standards with a 2% impurity threshold went into effect in September.

Malaysia's new rules have been postponed to next year, but the country’s proposed guidelines would represent some of the strictest purity rules in the world. They stipulate not only a minimum metal content of 94.75% but also zero impurities, including the copper dust that naturally forms through oxidisation. The introduction of these new rules leaves India and Pakistan as the main remaining markets for the import of lower-quality copper and copper alloy scrap.

Lack of Parts Delays New Smelter Development

Global logistic issues are impacting not only operational smelters but new smelter development as well. Daye Nonferrous has delayed commissioning at its new 400ktpa copper smelter from late 2021 to mid-2022 because its imported equipment or major parts have been delayed by the impact of the Covid-19 pandemic.

The new smelter, located in Huangshi, Hubei province, in China, is a primary smelting and refining project, using a combination of Flash Smelting and Flash Converting (Double-Flash) technology to process copper concentrate. It is designed to process 1.6Mtpa of copper concentrate and produce 400ktpa of copper cathode and 1.5Mtpa of sulphuric acid.

In addition to Daye’s new smelter, Jiangxi Copper’s 65%-owned 180ktpa Guoxin smelter and Zhongtiaoshan Nonferrous’ 180ktpa Houma smelter are expected to come online next year.

Smelter Margin Squeezed by Declining TC/RCs

Benchmark TC/RCs have declined for six straight years from US$107/t and US10.7¢/lb in 2015 to US$59.5/t and US5.95¢/lb in 2021 amid a tightening copper concentrate market. The declining TC/RCs have resulted in profitability retreating from the smelters. AME estimates that the smelter margin for long-term contracts dropped from US$661/t in 2015 to US$429/t in 2021, with smelters’ share of the copper price dropping from 12.0% in 2015 to 4.6% in 2021.

Spot TC/RCs fell to a 10-year low of around US$25/t at April-end due to tight concentrate supplies resulting from pandemic-related disruptions in major copper producing countries. In response, China's Copper Smelting Purchasing Team (CSPT) agreed to cut concentrate purchases by 1.26Mt from last year, or some 300kt on a metal content basis, and expand the use of alternative materials such as copper scrap and blister. Spot TC/RCs subsequently increased and have sustained at above US$60/t and ¢6.0/lb since August-end as supply risks ease.

After its six-year decline, benchmark TC/RCs are forecast to rise in 2022 to mid-US$60/t. The smelter margin is forecast to increase to US$459/t in 2022, with benchmark TC/RCs of US$65/t and US6.5¢/lb and a forecast average copper price of US$9,100/t. TC/RCs are expected to further rise between 2023 and 2026 amid greater concentrate availability. AME forecasts TC/RCs will further lift to US$75/t and US7.5¢/lb in 2023, US$85/8.5¢ in 2024, US$90/9.0¢ in 2025 and US$95/9.5¢ in 2026. From 2026 to 2040, TC/RCs are forecast to be flat at US$95/t and US9.5¢/lb.