en.Wedoany.com Reported - The persistent decline in treatment and refining charges is profoundly reshaping the profit structure of the global copper smelting industry, with smelters increasingly dependent on the value of by-products such as gold, silver, and sulfuric acid associated with copper concentrates to survive.
This situation stems from the fact that the expansion of China's smelting capacity has far outpaced global miners' ability to supply raw materials, a disconnect unlikely to reverse in the short term. Despite frequent market rumors of production cuts, China's refined copper output continues to rise, further exacerbating the supply-demand imbalance.
The annual benchmark treatment and refining charges (TC/RCs) stood at $80 per metric ton of copper and 8 cents per pound last year, dropping to $21.25 per ton and 2.125 cents per pound this year. Now, they have approached zero. For months, spot treatment charges have remained negative, meaning smelters must pay miners to process copper concentrates. In this context, the value of precious metals in concentrates and the conversion of captured sulfur into acid have become particularly important.
The loss of a key revenue stream for smelters has been offset by higher gold and silver prices. Meanwhile, geopolitical factors, such as a potential closure of the Strait of Hormuz due to a war with Iran, have disrupted Gulf supplies, further driving up sulfuric acid prices. Some Chinese copper smelters have even begun processing pyrite (commonly known as "fool's gold"), compensating for its higher sulfur content.
According to analysis by consulting firm CRU, treatment charges accounted for 39% of smelters' total revenue in 2018; by last year, "free metal" had become the largest revenue source, together with by-product credits (primarily sulfur), accounting for 50% to 53%. "Free metal" refers to the difference between the actual metal recovery by the smelter and the payable raw material quantity, a concept also applicable to copper and other metals.
The dramatic shift in smelters' business models has occurred in a very short time, directly reflecting the rapid expansion of China's processing capacity. Data shows that last year, China's refined copper output grew by 8% year-on-year to 14.72 million tons; meanwhile, according to the International Copper Study Group, global mine production increased by only 1% over the same period.
In November last year, the China Smelters Purchase Team (CSPT), comprising several of the country's largest producers, agreed to cut production by 10% to halt the decline in treatment charges. However, according to data from the National Bureau of Statistics, actual output still rose by 7.4% year-on-year between January and April this year. The rapid changes in the copper concentrate market have forced participants to reassess their reliance on traditional annual benchmark pricing. According to local data provider Shanghai Metals Market, Chilean producer Antofagasta has proposed shifting to spot index pricing in mid-year negotiations with Chinese smelters. The CSPT may oppose this, but without significant cuts in Chinese output, the gap between annual benchmarks and actual spot prices will continue to widen.
The core issue is whether this current financing model is sustainable in the medium term. CRU notes that the collapse of TC/RCs is painful on paper but manageable in reality for smelters with modern technology, high recovery rates for precious metals, and the ability to utilize sulfuric acid. However, the situation is far worse for smelters with outdated infrastructure, higher fixed costs, or geographical disadvantages in acid disposal. These plants' disadvantages compared to newer entrants make them more dependent on treatment charges. Many of these capacities are located outside China, posing a threat to Western copper supply chains. Glencore's Philippine smelter is already on care and maintenance, and its Australian processing plant only continued operations after receiving a A$600 million ($395 million) bailout from federal and state governments.
Last year, China already accounted for half of global refined copper production, up sharply from 15% in 2005, and this share is likely to grow further this year. Chinese smelters appear to be embracing a battle where only the strongest survive, while the West is struggling due to China's fierce competition for raw materials in a market with a structural shortage of concentrates.
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