Copper prices have surged to an all-time high on the back of the artificial intelligence (AI) data center investment boom, but smelters aren't smiling. With copper supply shortages persisting and competition among smelters intensifying, smelting fees have plunged.
◇ Even with copper prices up, smelting fees are still "0 won"
According to the smelting industry on the 18th, as of the 13th (local time), the spot price of copper traded on the London Metal Exchange (LME) was $14,285 per t (ton), trading near the record high ($14,455) set on the 6th. Demand for copper used in AI data centers and power grids is rising rapidly, but new mine development is progressing slowly, sending prices soaring.
According to the International Energy Agency (IEA), it takes an average of 17 years from mine discovery to production. The copper content of ore extracted from existing mines has also fallen by an average of 40% compared with 1991. The IEA expects that even if all current mine projects proceed as planned, copper supply in 2035 will still be about 25% short of demand.
Smelters process raw copper materials sent by miners into high-purity copper and collect fees. But while raw material output from mines has not increased sufficiently, smelters have expanded rapidly. To secure limited feed, smelters are now locked in a race over "who will process more cheaply."
China has accounted for more than 90% of the increase in global smelting output since 2005 and handled half of the world's refined copper production last year. A smelting industry official said, "Feed is shrinking while smelters are growing," and added, "Miners, who used to be in the weaker position, will continue to become the stronger party and choose the smelters."
As a result, smelting fees fell from $80 per t in 2024 to $21.25 last year, and this year dropped to $0 on an annual contract basis. In the spot market, smelting fees have been negative for months. Far from collecting processing charges, smelters are effectively bearing the expense to obtain feed. Some overseas smelters have even cut or halted production.
◇ Smelters offset losses with gold, silver and sulfuric acid
With smelting fees collapsing, the way smelters make money has also changed. According to market research firm CRU, smelting and refining fees accounted for 39% of smelter income in 2018, but last year "free metal" made up 50%–53%, and byproducts such as sulfuric acid accounted for 25%–27%.
Free metal refers to metals such as copper, gold and silver that are recovered in greater quantities during smelting than the amounts paid for to the miner. As smelting fees have fallen, the share of revenue from recovering more gold and silver contained in the feed and selling sulfuric acid generated during the process has grown.
LS MnM, Korea's largest copper smelter, is also offsetting the drop in smelting fees with revenue from byproducts such as gold, silver and sulfuric acid. Despite a sharp decline in smelting charges in the first quarter, LS MnM booked 189.6 billion won in profit on the back of rising prices for byproducts including gold, silver and sulfuric acid. Results are believed to have improved in the second quarter as well due to a surge in sulfuric acid prices. On supply disruptions from the Middle East, East Asia sulfuric acid prices climbed to around $300 per t (ton) by the end of the second quarter, roughly triple the level a year earlier.
Korea Zinc is increasing copper production using recycled feed such as waste electronics and scrap cables to reduce dependence on copper raw materials from mines. The goal is to ease the burden of securing feed while expanding copper output. The company plans to raise copper production to more than 50,000 t this year and expand it to 150,000 t annually over the long term.
An industry official said, "Even if copper prices rise further, it will be difficult to improve profitability unless feed shortages and overheated competition among smelters are resolved," and added, "The gap may widen between companies that move away from a business model reliant on smelting fees by diversifying feed and generating revenue from byproducts, and those that do not."