China Is Tightening Its Grip On Copper, Which Is Key To The World's Energy Transition

China is in the midst of a breakneck expansion of its copper industry, which is reshaping global flows of the metal essential to the world's energy transition.
The Asian country's control over supplies of other green metals such as lithium, cobalt and nickel used in electric car batteries has prompted worried Western governments to encourage independent supply chains. Meanwhile, China's refined copper production and its share of global output are set to hit a record this year after a surge in new smelter construction.
The rapid increase in capacity has breathed new life into a market that for two decades has been largely driven by how much Chinese buyers are willing to pay. The country will still import more and more copper, but more as ore rather than refined metal.
Copper is considered the most important commodity in the decarbonisation era because it is used in everything from electric cars to wind turbines and massively expanding power grids. China's voracious appetite for green technology will be a bright spot in the beleaguered world metals market in 2023.
"Like all countries, China sees a strategic need for copper - especially now that green energy applications are growing - and like everyone else, it wants to ensure copper self-sufficiency," said Craig Long, principal analyst at CRU Group, a research firm. According to CRU, China will produce about 45 per cent of the world's refined copper this year.
Smelter construction will be a big talking point this week as hundreds of Copper executives head to Shanghai, China's commodities hub, for Asia Copper week. Miners and smelters will negotiate key annual ore supply contracts and participants will get an update on Chinese demand.
Despite the economic damage caused by the pandemic and China's real estate crisis, metal consumption in China is relatively strong in 2023. That may have helped copper, which is only slightly lower than this time last year, avoid a further slide in the market.
CRU expects China's copper demand to grow 5% this year, while Goldman Sachs Group Inc. named copper as one of its favorite commodities next year, citing a "strong green demand environment" - especially in the Asian giant.
"We expect Chinese investors to be less cautious than feared two months ago," Colin Hamilton, managing director of commodities research at BMO Capital Markets Ltd., wrote in a note ahead of the Shanghai meeting.
The same path
The expansion of smelting capacity echoes the history of other metals industries in China. Until 2006, for example, the country was a net importer of steel. But a wave of new capacity eventually led to a flood of exports - hurting international steelmakers and exacerbating global trade tensions before Trump took office.
Carlos Risopatron, head of economics at the International copper Study Group, said China will add another 45% of its copper smelting capacity by 2027, accounting for 61% of the world's projected new capacity over the same period.
Simon Hunt has worked in the copper industry for 50 years and now runs his own consultancy. He estimates that as copper production surges, China could become a net copper exporter by 2025 or 2026. It's not a consensus, but the viability of exports is a topic of discussion in the industry.
In any case, Chinese copper smelters are likely to put pressure on global peers in the coming years as they "pay more" to get the raw materials they need, Hunt said. The result could be the closure of older smelters in other parts of the world.
Net importer
The rapid expansion of copper smelting capacity is triggering a race for copper concentrate to meet smelter demand. Annual contract talks will take place this week against the backdrop of a tightening raw materials market.
When concentrate is scarce, miners pay smelters to process the ore. This dynamic could be reflected in fees falling from $88 a tonne to $84 a tonne next year, according to estimates from the Shanghai Metals Market.
"Global copper concentrate supply will be loose in the first half of the year and then turn into a shortage in the second half," said Meng Wenwen, My steel analyst. He also expects commissions to fall.
At the same time, the increase in smelting is reducing China's reliance on imported copper, leading to expectations of an oversupply of refined copper, the global benchmark price of which is set by the London Metal Exchange.
That has caused headaches for traditional suppliers to China, such as Chile, and forced Codelco, the world's largest copper producer, to slash the annual premium it charges Chinese buyers.
To be sure, China is not the only country building new smelters. Copper belts in India, Indonesia and Africa are also adding capacity. China is also considering restrictions on smelter expansion for environmental reasons, although such restrictions are unlikely to come soon.
Demand outlook
The rise in Shanghai copper prices comes amid heightened uncertainty about global growth, with major economies still facing recession risks and investors unsure whether the US Federal Reserve has finished raising interest rates.
Copper edged up from its lowest close in more than two weeks on Monday, trading at $8,053 a tonne as of 10:28 a.m. Time in Shanghai. It is down about 3.8% this year.
While copper analysts generally expect China's copper demand growth to slow slightly next year, it is still likely to outpace the rest of the world as Beijing continues to boost its economy. A stable China should 'provide some support to commodity consumption and prices' next year, said Wenyu Yao, an analyst at Citigroup Inc.
"There are risks, such as rising metal production, but demand concerns will be more focused on the rest of the world," said Jiang Hang, head of trading at Shanghai Yongsteel Resources Co. "For China, there is not much to worry about."