China's refined copper production is surging to record highs, creating a complex situation for the global market.
At first glance, this might seem strange. The primary source of profit for copper smelters, known as treatment and refining charges (TC/RCs), has collapsed. These are the fees miners pay smelters to process raw copper concentrate into pure metal. With TC/RCs near zero or even negative, smelters are technically losing money on their core business. So why are they producing more than ever?
The answer lies in two key areas. First, by-product economics have come to the rescue. When smelters process copper ore, they also produce other valuable materials, most notably sulfuric acid. Strong demand from the fertilizer industry, combined with supply constraints, has driven sulfuric acid prices to unusually high levels. This extra income is substantial enough to offset the losses from low TC/RCs, keeping smelters profitable and incentivizing them to maintain high output.
Second, the supply of raw materials has found a temporary solution. A speculative price rally in January, which saw copper hit all-time highs above $14,500 per tonne, encouraged the collection and sale of scrap copper. This influx of scrap provided smelters with an alternative feedstock to the scarce and expensive copper concentrate, allowing them to sustain their record-breaking production runs.
However, this flood of supply is colliding with weakening demand. The period after the Lunar New Year is typically slow, and high prices have discouraged immediate physical purchases. As a result, unsold copper is piling up. Inventories at major exchanges like the London Metal Exchange (LME) and the Shanghai Futures Exchange (SHFE) have surged to multi-year highs. This visible surplus is signaling to the market that there's more than enough copper to go around, effectively capping the recent price rally and creating a risk that prices could stall or even decline.
- Treatment and Refining Charges (TC/RCs): Fees paid by mining companies to smelters to convert copper concentrate (raw ore) into refined copper cathode (pure metal). Low TC/RCs indicate a tight supply of concentrate relative to smelting capacity.
- By-product: A secondary product generated during the manufacturing process of a primary product. In copper smelting, sulfuric acid is a major by-product whose sales can significantly impact a smelter's profitability.