Discovery of overseas investment opportunities in the copper industry chain

At the 2024 (19th) SMM Copper Industry Conference and Copper Industry Expo - 2024 SMM Strategic Consulting Summit Forum-Discovering Overseas Investment Opportunities in the Copper Industry Chain, jointly organized by SMM and Shandong Humon Smelting Co., Ltd., SMM Consulting Manager Wang Hemeng and SMM Senior Consulting Manager Fei Changyun shared the discovery of investment opportunities in the overseas markets.

Copper industry chain

In 2023, the concentration of the upstream copper smelting industry in the global copper industry chain was higher than that of the midstream copper processing and terminal industries.

Similar to the global pattern, in 2023, the concentration of the upstream copper smelting industry in China's copper industry chain was significantly higher than that of the midstream copper processing and terminal industries.

In 2023, the gross profit margin of upstream copper smelting in the global copper industry chain was significantly higher than that of midstream copper processing and terminal industries.

In 2023, the gross profit margin of upstream copper smelting in China's copper industry chain was the highest, mainly due to the shortage of domestic copper ore resources.

Copper resource potential in emerging markets along the Belt and Road Initiative

Many of the countries participating in the Belt and Road Initiative have rich mineral resources and are the main suppliers of mineral raw materials in the world.

According to public data, among the four major mineralization areas of the global mineralization units, the countries participating in the Belt and Road Initiative have a total of nearly 400 super-large and large mineral deposits and nearly 200 mineral resources. Among them, iron ore reserves account for 42% of the world’s total, copper accounts for 18%, and gold accounts for 21%.

Resource

•The regions along the “Belt and Road Initiative” have rich mineral resources, with copper reserves reaching 130 million tons, accounting for 18% of the world's copper reserves.

•The cooperation among countries along the Belt and Road Initiative in the field of mineral resources is highly complementary. For example, gold, copper, cadmium, nickel and other minerals that are in short supply in China, as well as strategic emerging minerals, are advantageous resources for some countries in the Belt and Road Initiative region. The "Belt and Road Initiative” is conducive to optimizing the allocation of energy and mineral resources, rationally utilizing and releasing their potential, improving regional production and supply patterns, and ensuring China's resource and energy security.

Policy

•China has promoted the “Belt and Road Initiative” cooperation by introducing new policies and measures. More and more countries are aligning their development strategies with China’s initiatives.

•At the same time, countries and regions in the “Belt and Road Initiative” region are also adjusting mining policies, stabilizing mining order, enhancing the attractiveness of mining investment, and signing cooperation agreements with China.

•The support of national policies has made exchanges and cooperation between China and countries and regions along the “Belt and Road Initiative” increasingly frequent and in-depth. Many landmark cooperation projects have been implemented, opening up a variety of effective paths to unleash the potential of energy and mineral resources.

In recent years, with the continuous improvement of China’s overall national strength, the “Belt and Road Initiative” construction and international production capacity cooperation have accelerated, China’s foreign investment policy system has become increasingly complete, and enterprises’ overseas investment has accelerated.

Copper ore

China's key strategic metal supply chains face challenges amid politicization of global resource issues

•The dependence on overseas copper ore has increased, and the import volume has continued to increase. More than two-thirds of China's strategic mineral resources reserves are at a disadvantage in the world. Moreover, the per capita resource possession of metal resources such as cobalt, chromium, manganese, nickel, iron and copper is far lower than the world’s average.

•Mineral resources like iron and copper are becoming increasingly scarce as demand continues to increase. China's major strategic metal mineral resources are of poor quality and are scattered, with few large mines and complex ore types. They are mainly lean ores which are difficult to mine and dress, and are difficult and costly to develop and utilize.

•The security of the metal supply chain faces challenges, and the competition among major powers in the field of key metal minerals increases geopolitical risks.

Compared with other countries rich in mineral resources, China's copper resources are seriously insufficient.

Over the past decade, China's copper concentrate self-sufficiency continued to decline, and the imbalance between supply and demand gradually deepened.

Chinese companies’ copper mines in Africa are concentrated in Congo (DRC).

In addition, Chinese companies are also investing in copper mines in regions other than Africa, such as South America, Asia, and Oceania.

Copper processing

China ranks first in the world in the production and sales of copper semis, accounting for about 80% of the world's total.

► SMM analysis : The global copper processing industry is mainly distributed in Asia. Asia's copper semis production capacity accounts for nearly 90% of the world's total, and the production capacity is mainly distributed in China, South Korea, Japan and other countries. Over the past 20 years, China's production and sales of copper semis have ranked first in the world. From 2019 to 2023, production contribution gradually approached 80% of the world's total, and its consumption approached 70%.

China's copper semi-finished products industry is facing an oversupply market

COVID Era: From 2020 to 2023, the pandemic led to a shrinking of downstream demand and production of copper semi-finished products. China's economic recovery in 2023 was weaker than expected, leading to an increase in the surplus of copper semi-finished products.

Post-COVID era: From 2024 to 2030, China will continue to carry out supply-side reforms in the future. Some low-end copper rod companies will be forced out of the industry, the overall oversupply situation will be alleviated, and new energy-related industries will drive the growth of downstream copper demand in the future.

Characteristics and problems faced by the copper processing industry

The development of the industry presents the following characteristics: the growth rate of production has begun to decline and is in a low-speed growth channel; the international production capacity layout has been formed (Hailiang, Jinlong, Jintian, Bowei, Tongling); the development of the industry is tending to be concentrated; the industry profit margin is low, and the debt ratio continues to increase;

Problems facing the development of the industry: insufficient competitiveness in the international market, high-end products still rely on imports; insufficient process technology control and management capabilities; continued disorderly expansion of production capacity; overly traditional operating model and too slow to adapt to market changes; market risk control measures are too simple, and some companies do not fully understand and utilize the financial attributes of copper.

The layout of Chinese enterprises' copper intermediate products industry has reached Europe, America, Southeast Asia

Copper foil is mainly used for its electrical conductivity, thermal conductivity and electromagnetic wave shielding properties. According to the main application, it can be roughly divided into two categories: printed circuit board use and non-printed circuit board use (such as lithium-ion battery anode carrier, shielding material, etc.).

Copper pipes have good electrical and thermal conductivity. Copper pipes have strong corrosion resistance, are not easy to oxidize, and are not easy to react chemically with some liquid substances, and are easy to bend into shape.

Copper pipes: China is the world's largest producer of copper pipes, with leading processing and manufacturing capabilities. The industry is highly concentrated, and leading enterprises are expanding production overseas to improve their risk resistance.

► Leading enterprises accelerate overseas expansion and improve ability to resist risks

China's copper pipe processing industry has strong global comparative advantages. At the same time, China is the world's largest producer and consumer of copper pipes. About 10% of domestic copper pipes are exported.

The overseas layout enables copper pipe processing companies to reduce the risk of anti-dumping sanctions, reduce losses caused by exchange rate changes, and improve the ability to resist risks.

Leading domestic companies have also invested in building factories or conducting mergers and acquisitions overseas, and are actively planning production, supply and sales channels in overseas markets.

Jinlong Copper has built factories in the United States and Mexico, with an overseas production capacity of 120,000 tons/year; Hailing Co., Ltd. has established bases in Vietnam, Thailand, Europe, and the United States through self-construction and acquisition. After the US base is completed, the company's overseas production capacity will reach 343,000 tons/year.

Copper foil: Domestic capacity expansion eases supply tightness, but competition is intensifying; the overseas new energy market is developing rapidly, and battery companies need domestic copper foil companies to support them to develop overseas

► Domestic industry status: The expansion of domestic copper foil industry capacity has eased supply tightness, but competition is intensifying;

In the next few years, the domestic lithium-ion battery copper foil industry will see increasing output and decreasing prices or increasing volume and stable prices. Competition among companies will intensify, and the competition for market share will become more intense.

In 2022, the rapid expansion of the domestic copper foil industry's production capacity eased the tight supply situation in the domestic lithium-ion battery copper foil industry, and processing fees showed a downward trend. In 2022, the processing fee for lithium-ion battery copper foil dropped by about 30%.

As domestic copper foil production capacity is further expanded, copper foil processing fees will continue to be in a downward or remain at the current level.

►Foreign market status: The foreign new energy market is developing rapidly, and copper foil is in short supply.

According to SMM's forecast, global sales of new energy vehicles will reach 52.12 million units in 2030, and the penetration rate of new energy vehicles will continue to increase and exceed 50% in 2030.

With the implementation of the IRA Act in the United States and the supply-side innovation driven by leading automakers such as Tesla, the U.S. new energy vehicle market is expected to grow significantly, which will have an impact on the competitive landscape of the global new energy vehicle industry chain.

Europe and North America have ambitious plans for battery production capacity , but local lithium-ion battery copper foil production capacity is relatively scarce, causing foreign competitors to increase the development of lithium-ion battery copper foil business and build copper foil factories in Southeast Asia, Europe and the United States to support the newly expanded production capacity of their own battery companies.

►China's export challenges: The promotion of localization of European and American supply chains has increased the challenges of domestic lithium-ion battery product exports

China's exports of copper foil and battery products face high tariff challenges from the EU and the United States, weakening the competitive advantage of Chinese products. Currently, China's copper foil exported to the EU is subject to a 5.2% tariff, and copper foil exported to the United States is subject to a 26.3% tariff; batteries exported from China to the United States are subject to an additional 25% tariff on top of the 2.7%, for a total of 27.7%. As global competition in the new energy industry chain intensifies, countries are increasing their support for their own industry chains.

Many Chinese power battery companies have started a new round of overseas expansion, and overseas factory construction continues to heat up

Electromagnetic wire: With the end of the COVID-19, stimulated by the recovery of traditional industries and the new energy vehicle industry, the supply of major copper electromagnetic wire producing countries in the world will increase year by year. China, the United States and Europe are the three major copper electromagnetic wire suppliers, and the total supply accounted for 85% of the world’s total in 2023.

►SMM analysis: Affected by the growth of downstream demand markets around the world, especially the development of new energy vehicle industry, the supply of copper magnet wires around the world will show a continuous growth trend in the next 10 years; the development speed of infrastructure and national power grids in Central Asia such as India and other regions such as Vietnam has accelerated, and the supply growth rate of their magnet wires has shown an increasing trend; global copper magnet wire production is mainly concentrated in China, the United States, Europe, Japan and South Korea. Among them, in 2023, the production capacity of Essex Furukawa Magnet Wire in the United States was 390,000 tons, 300,000 tons at China Jingda, 180,000 tons at China Jintian and 180,000 tons at China Grand Wall; due to production technology restrictions, China's current copper magnet wire products are mainly low-end, while the copper magnet wire products of developed countries are mainly high-end.

Electromagnetic wire: Driven by the steady development of traditional downstream industries such as electrical appliances and rail transit, as well as the rapid development of the new energy industry, the global demand for copper electromagnetic wire will grow steadily in the next 10 years. China, the United States and Europe are the main consumption areas.

►SMM analysis: The global downstream demand for copper magnet wire is mainly distributed in China, the United States, Europe, Japan, among which the total consumption of the top three regions accounts for more than 80%. Driven by the steady development of traditional downstream industries such as electrical appliances and rail transit, as well as the rapid development of the new energy vehicle industry, the demand for copper magnet wire around the world will show a sustained growth trend in the next 10 years. Due to the growth in demand for new energy vehicles, the demand for electromagnetic wire in China, Japan, South Korea, Central Asia and other countries is leading the growth, while the growth in demand for electromagnetic wire in Central Asia and other countries is driven by the growth in demand for infrastructure and power grids. Among the above-mentioned major copper magnet wire consumption areas, Europe, as the third largest consumption area, will face a shortage of copper magnet wire in the next 10 years.

As a net exporter of copper magnet wire, China mainly imports high-end products and exports medium and low-end products. In the future, as China's copper magnet wire production technology improves, the self-sufficiency rate of high-end products will increase, the import volume of copper magnet wire will decrease year by year, while the export volume will continue to rise.

Copper scrap

Major countries in the world have released timelines for achieving carbon neutrality/carbon peak plans

China's recycled metal industry is at a critical stage of development, with both opportunities and challenges

China's copper scrap market continues to be undersupplied, with strong demand from downstream smelters and manufacturers but limited domestic scrap supply

China's copper scrap policy is gradually tightening, and recycled metal companies are willing to develop overseas

►Recycled metal enterprises development overseas: According to SMM research, most recycled metal enterprises in the market keep an eye on the overseas investment environment. Some enterprises have already built factories overseas or sent goods overseas for processing and then transported them back to China. According to public data, as China's copper scrap import policy has become increasingly strict, China's imports of copper scrap from Southeast Asia have soared, with shipments by countries such as Thailand, Malaysia and the Philippines increasing by more than 100%. The companies said that through a lot of field trips and research, Southeast Asia is very suitable for companies as a transit point for overseas copper scrap imports . The main reasons are that there are many local Chinese people, who can more easily integrate into the local culture; it is close to the port, which facilitates transportation, etc.

There are three reasons why players in China’s recycling market are going overseas: to stabilize the copper scrap supply chain, to support downstream globalization, and to export advanced technology.

To ensure the supply of upstream scrap metal, China's leading recycling companies set up subsidiaries around the world

Taking the automotive industry as an example, Chinese recycling companies have already started operations overseas to support the carbon neutrality plans of automakers.

Regulations on solid waste import and export management in various countries (part):

Malaysia: Malaysia is the largest waste importer in Southeast Asia and has a relatively complete legal system for waste management. According to the law, in addition to having certain qualifications, importers and exporters are generally required to submit application forms, licenses, sources of waste, importer-exporter contracts, contracts with owners of waste treatment/recycling facilities, appraisal agency data, bank guarantees, etc. In accordance with the Environmental Quality Regulations, the Malaysian government's environmental authorities manage the entire process of waste from generation to collection, transportation and final disposal. Malaysia is the first country in the world to implement the privatization of solid waste management. Four private consortiums were selected from five regions across the country and signed contracts with the government to collect and dispose of solid waste.

Vietnam: Vietnam's Environmental Protection Law (2005) defines the principles of solid waste management and recycling, while the Regulations on Waste Allowed as Production Raw Materials lists the list of recyclable waste materials that are allowed to be imported. Vietnam prohibits the import of solid waste, but allows the import of scrap. Every year, Vietnam imports a large amount of scrap steel, scrap plastic, waste paper, etc. to make up for the shortage of raw materials for industrial production. Waste management in Vietnam involves environmental protection departments, industry and trade departments, and customs at all levels. These departments update the list of waste allowed to be imported and adjust corresponding management policies based on the actual situation of domestic waste imports. Vietnam stipulates that different fines will be imposed for violating waste import laws, illegal imports that cause environmental pollution, and importing hazardous waste.

Risks of developing overseas:

Southeast Asia's recycling industry policy requirements are becoming increasingly stringent

•Vietnam: The government is planning legislative action to address waste imports. Vietnam will review legal documents on waste import management to make necessary revisions, according to reports.

•Thailand: Stopped importing 432 types of electronic solid waste and plans to ban the import of plastic waste in the next two years. Thailand also became another country, besides China, to ban the import of foreign electronic waste in 2018.

•Malaysia: The import of any solid waste that cannot be properly recycled and does not comply with the Environmental Quality Act is prohibited.

There may be problems with labor recruitment

• Local residents in Southeast Asia have low willingness to work in the recycled metal industry and have high salary requirements. Some companies take the risk of hiring undocumented foreign workers to reduce costs, but this practice is risky and they will be punished if discovered by local governments.

Overseas processing quality may be worrying

•Southeast Asian countries lag behind China in production technology, disassembly equipment and management methods. For example, the copper granule, regardless of its quality, was mixed together and loaded, resulting in a lot of copper granule being difficult to use. In addition, during the dismantling process of copper scrap, they only dismantle wires, but cannot dismantle other circuit boards, motors and other equipment. The machinery and equipment are old and the dismantling efficiency is low.