What Impact Does China’s Copper Dominance Have on Energy?

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What Impact Does China’s Copper Dominance Have on Energy?

China's Dominance in Copper: A Game Changer for Global Energy Transition

China is currently undergoing a rapid and ambitious expansion of its copper industry, which is having a profound impact on global copper supply dynam

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China is currently undergoing a rapid and ambitious expansion of its copper industry, which is having a profound impact on global copper supply dynamics—a metal pivotal to the world’s ongoing energy transition. The nation’s stronghold on the production of other vital green metals like lithium, cobalt, and nickel, crucial components of electric vehicle (EV) batteries, has already raised concerns among Western governments, leading them to encourage the development of separate supply chains. Meanwhile, China’s production of refined copper, along with its share of global output, is set to reach record levels this year due to a surge in the construction of new smelters.

This surge in smelting capacity adds a fresh dimension to a market that, for the past two decades, has been largely influenced by Chinese buyer demand. While China will continue to import increasing quantities of copper, the nature of these imports is changing, shifting more towards copper ore rather than refined metal.

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The Significance of Copper in the Age of Decarbonization

Copper has earned the title of the most critical commodity in the era of decarbonization, primarily due to its versatile applications, ranging from electric vehicles (EVs) and wind turbines to expansive power grids. The surging demand for green technologies in China has been a bright spot in an otherwise challenged global metals market in 2023.

“Like all countries, China sees a strategic need for copper—particularly now with the growth in green energy applications—and China, like other nations, aims for self-sufficiency,” notes Craig Lang, principal analyst at CRU Group. According to CRU, China is poised to account for approximately 45% of global refined copper output this year.

Key Discussions at Asia Copper Week

The upcoming Asia Copper Week in Shanghai is set to be a pivotal event for the copper industry. Hundreds of industry executives, including miners and smelters, will convene to negotiate essential annual ore-supply contracts and gauge the latest trends in Chinese demand.

Despite the financial challenges posed by the pandemic and China’s property market crisis, the nation’s metals consumption has remained relatively robust in 2023. This resilience has likely prevented a more significant market slump, with copper prices only slightly lower than the previous year.

Bullish Outlook for Copper in China

CRU anticipates a 5% growth in copper demand in China this year, while Goldman Sachs Group Inc. has designated copper as one of its top commodity picks for the next year, citing a “robust green demand environment,” particularly in China.

“We expect to find Chinese players slightly less cautious than may have been feared two months ago,” remarks Colin Hamilton, managing director for commodities research at BMO Capital Markets Ltd.

Echoes of the Past: A Familiar Growth Trajectory

The rapid expansion of smelting capacity in China draws parallels with the nation’s historical development in other metals industries. Until 2006, China was a net importer of steel, for instance. However, a wave of new capacity ultimately led to a surplus of exports, causing tensions in international trade.

According to Carlos Risopatron, director of economics at the International Copper Study Group, China’s copper smelting capacity is set to increase by another 45% by 2027, accounting for a staggering 61% of expected new plants worldwide during that period.

Simon Hunt, a seasoned veteran of the copper industry, suggests that China could become a net exporter of copper by 2025 or 2026 as production continues to surge. While this is not a universally agreed-upon view, the potential for exports is a topic of considerable discussion within the industry.

Implications for Global Copper Suppliers

For now, the rapid expansion of copper smelting capacity in China has triggered a scramble to secure copper concentrate for feeding the smelters. Annual contract negotiations are taking place against the backdrop of a tightening market for this essential raw material.

As concentrate becomes scarcer, miners pay lower treatment charges to smelters for processing ore—a dynamic likely to result in a drop in fees from $88 to $84 per ton, according to an estimate from Shanghai Metals Market.

“The global copper concentrate supply will be loose in the first half of the year before shifting to a deficit in the second,” predicts Mysteel analyst Meng Wenwen. A decrease in fees is also expected.

Furthermore, the surge in smelting capacity is making China less reliant on imported copper metal. This shift is anticipated to result in an oversupply of refined copper, which dictates prices on the London Metal Exchange—the global benchmark for copper prices. This development poses challenges for traditional copper suppliers to China, such as Chile, and has led the world’s largest copper producer, Codelco, to reduce the annual premium it charges Chinese buyers.

Global Expansion of Smelting Capacity

It’s essential to note that China is not the only nation expanding its smelting capabilities. India, Indonesia, and Africa’s copper belt are also increasing their capacity. China is also contemplating restrictions on smelter expansions for environmental reasons, although such limitations are unlikely to be imposed immediately.

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The Uncertain Global Economic Landscape

The timing of the Shanghai copper event coincides with heightened uncertainty in global economic growth, with major economies still facing the risk of recession, and investors unsure about the Federal Reserve’s stance on interest rate hikes.

Despite broad expectations of a slightly slower expansion in Chinese demand for copper next year, China is likely to outperform the rest of the world due to continued efforts by Beijing to bolster its economy. Citigroup Inc. analysts, including Wenyu Yao, believe that a stable China will “provide some support to commodities consumption and prices” in the upcoming year.

Jiang Hang, head of trading at Yonggang Resources Co. in Shanghai, notes, “There are risks, like rising metal output, but demand concerns will be more focused around the rest of the world. For China, there aren’t too many worries.”

Conclusion

China’s aggressive expansion in the copper industry is reshaping global copper supply dynamics and has significant implications for both domestic and international markets. The nation’s strategic focus on securing copper for its green energy applications is contributing to its growing dominance in the industry. As China continues to build its smelting capacity, the world will closely watch how this development affects global copper prices and the traditional suppliers to the Chinese market.

Source: BMO Capital Markets Ltd.

Frequently Asked Questions (FAQs)

1. Why is copper considered crucial in the context of decarbonization? Copper is essential for various green technologies, including electric vehicles, wind turbines, and expanded power grids, making it a vital component in the global transition to cleaner energy sources.

2. How much of the global refined copper output does China account for? China is expected to contribute approximately 45% of the global refined copper output this year, according to CRU Group.

3. What are the potential implications of China’s copper smelting capacity expansion for global suppliers? The surge in China’s smelting capacity could lead to a shift in copper concentrate supply dynamics, resulting in lower treatment charges for miners and impacting traditional copper suppliers to China.

4. Could China become a net exporter of copper in the near future? While not universally agreed upon, some industry experts suggest that China could become a net exporter of copper by 2025 or 2026 due to its expanding production capacity.

5. How is the global economic landscape impacting the copper market? The global economic landscape remains uncertain, with major economies at risk of recession. However, China’s stability and ongoing efforts to boost its economy are expected to provide support to copper consumption and prices.

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