How the global copper concentrate deficit can impact mining in Chile

The copper market is experiencing a concentrate deficit that will reach 1.9Mt this year and will increase in 2025 and 2026, according to Chile’s state copper commission Cochilco.

That is expected to reduce treatment and refining charges (TC/RCs) to a minimum, which, combined with a global excess of smelting and refinery capacity, could have a strong impact on Chile, the world’s largest copper producer.

Of Chile's 2023 copper production of 5.25Mt, concentrates accounted for around 53%, a figure that is expected to rise to 77% in 2040, according to Cochilco.

But concentrate shortages are forecast to continue. BNamericas speaks to Erik Heimlich, head of base metals supply and principal copper analyst at consultancy CRU, to find out more.

BNamericas: What impact does the copper concentrate shortage have?

Heimlich: The main impact is being felt by the smelting and refining industry because there is an excess of smelting capacity in the market and because of this the TC/RCs are low and will possibly fall further next year.

Several smelters and refineries are operating at lower throughput rates, which means higher costs, but due to the level of concentrate shortages and smelting overcapacity, production cuts are likely to be implemented to achieve market balance.

BNamericas: China has a large installed smelting capacity and new supply is coming in. How will the scenario play out and what will be the repercussions for Chilean copper mining?

Heimlich: China has seen the most growth in smelting capacity over the past 10 years, and there are projects for the next five years, although these could be delayed due to current market conditions. Smelting and refining capacity outside China has long been in decline, but new capacity is now being built primarily in three regions.

In Africa, especially in the Democratic Republic of Congo and Zambia, because smelting represents good business, since exporting concentrate is expensive for logistics reasons and they have high demand for sulfuric acid.

In Indonesia, driven by a public policy that seeks to limit the export of raw materials, after years of having been a major exporter of concentrates to China and Japan.

In India, which is a major player in the concentrates market due to the expansion of its economy and consumption, the Adani project came into operation this year, which, in addition to a smelter and refinery, contains a line of semi-manufactured copper products and plans for growth.

BNamericas: Will production cuts be implemented to normalize the smelting industry?

Heimlich: When there is an imbalance in the concentrate market, the first thing that happens is that concentrate inventories are consumed in the value chain. Second, project start-ups are delayed and third, smelters stop operating at full capacity.

If the concentrate deficit is very high, as projected for 2025, even a reduction in the operating rate won't be sufficient, so temporary or permanent closures would be necessary.

BNamericas: Could the recent stimulus announcements by the Chinese government change the copper market?

Heimlich: Although there is a deficit of concentrates, this isn't the case for refined copper, which is the product traded on the exchanges and whose market balance determines the price. It is expected that in 2024 there will even be a small surplus of refined copper. So, when we talk about Chinese policies, the impacts are essentially on the demand for refined copper, where China accounts for more than half of world consumption.

This demand has been affected by weakness in the real estate and construction sectors in China, which are major copper consumers. Recent policies include interest rate cuts and mortgage lending easing to revive investment in the real estate sector in order to boost the economy.

However, as these are monetary mechanisms that aren't accompanied by fiscal measures, the direct impact on the copper market is, for the moment, limited.

BNamericas: Chile has a strategy to increase smelting and refining capacity, to protect small and medium-sized mining, to avoid losing other metals in concentrate shipments and to improve the traceability of the carbon footprint of local copper. Would it be advisable to implement it?

Heimlich: Chile's smelting capacity is extremely old and one of the most expensive in the world. Before expanding capacity, we must evaluate the technologies, analyze how to achieve modern and efficient capacity, and plan projects that are 100% self-sustaining from an economic point of view.

Chile isn't small in terms of refined copper production, via smelting and refining, so it's important to carefully study how to replace capacity. While we have the disadvantage of high labor costs, there are advantages in proximity to operations, energy costs and the possibility of processing complex concentrates. But, today it wouldn't be convenient with current TC/RC prices.

BNamericas: What are the prospects for copper prices in the short/medium term?

Heimlich: Copper has remained close to US$9,000/t, equivalent to about US$4/lb, despite macroeconomic difficulties. This is interesting because average operating costs in Chilean mines are much lower.

However, what is holding up the price is the high cost of developing a mining project, and the importance of copper for the energy transition, which generates optimism about the future.

Considering that in 2024 there is a small surplus of refined copper that will not be repeated in the coming years, the price should at least remain stable or be higher in nominal terms. In addition, in the medium and long term the outlook is bright because some problems would become more pronounced, such as the slowness of project development compared to the growth in demand. This puts upward pressure on the price.

BNamericas: The market for recycled copper and scrap has also been growing. What will be the impact in the coming years?

Heimlich: The scrap market is very significant. If the price of copper rises, there's an immediate influx of scrap into the market. It’s a very cyclical segment that depends heavily on the price of copper, which ultimately determines how much scrap will enter the system. Countries have been increasingly interested in developing this secondary sector. In North America, Europe, Japan and China, several refined copper production projects are based on the production of secondary copper, as an advance of the circular economy. Another important factor is the shortage of concentrates, so one way or another scrap emerges as a substitute.

BNamericas: What about the possibility of replacing copper with aluminum?

Heimlich: Aluminum has a greater chance of penetration in the copper market in areas such as wiring where a lower price ratio is required to be profitable.

Other susceptible sectors are heat transmission in air conditioning or electrical transmission. However, these cases don't have a replacement process similar to scrap when the price rises, since it's related to safety issues where there is a lot of regulation.

BNamericas: What do you think about the stagnation of copper mining in Chile and when do you think it will recover?

Heimlich: The increase in Chilean production depends on solving several operational problems, and to that extent, recovery potential will be generated. Some projects have taken longer than expected, and this is happening after a period in which very little progress was made. Mining is currently undergoing a stabilization process, so I believe the recovery will come closer to the next decade and through projects that are mostly brownfield and large-scale.