Orient: The processing fee for copper concentrate has been decided. Pessimistic expectations at the smelting end. The shoe finally drops.

Orient released a research report stating that by 2026, the benchmark processing fee for copper concentrate will be zero, highlighting the structural contradiction between copper ore supply and smelting. Traditional demand is solidifying and new emerging sectors are experiencing strong growth, causing a situation where the supply of ore may not meet demand, thus supporting the copper price. In the medium term, with the resumption of large-scale mines and adjustments in the domestic smelting industry, there may be room for marginal improvement in processing fees. It is recommended to pay attention to resource-based mining companies and leading smelters with self-sufficiency. Orient's main points are as follows: In 2026, the benchmark processing fee for copper concentrate will be reduced to zero, highlighting the contradiction between copper supply and smelting On December 19th, representatives from Chinese copper smelters and Antofagasta agreed on a benchmark processing fee of $0 per ton and $0 per pound for the copper concentrate long contract for 2026, a significant decrease compared to the benchmark of $21.25 per ton and $2.125 per pound in 2025. Due to unexpected disturbances such as earthquakes, mudslides, and delays in tailings management facility development since 2025, the annual ore production guidance has been reduced by more than 500,000 tons. The supply of copper concentrate in 2025 is expected to be similar to that in 2024. The significant decrease in the 2026 benchmark compared to 2025 further highlights the structural contradiction between copper ore supply and the demand for electrolytic copper at the smelting end, indicating that the smelting end of copper may continue to be under pressure. Traditional demand is solid, while the growth in emerging sectors is significant, leading to a situation where the supply of ore may not meet demand In terms of downstream copper usage, traditional electrical applications account for the largest share, at approximately 28%, while emerging sectors such as renewable energy generation have seen rapid growth in copper usage. According to the International Energy Agency (IEA), clean energy is expected to increase the demand for copper to 7.737 million tons by 2024, a 28.9% increase from 2021. The bank believes that with high levels of global investment in power grid infrastructure and aging grid systems in Europe and America, the upgrade of global power grids and infrastructure may provide a solid foundation for copper demand. As the supply of copper ore increases, and downstream demand continues to grow, the situation where the supply of ore may not meet demand is expected to persist, providing sustained support for copper prices in the medium term. Negative expectations for smelting fees, combined with increased production from mines in the medium term and the expectation of a "reverse internal circulation" in the smelting industry, may lead to marginal improvements in spot processing fees Although the situation where the supply of copper concentrate may not meet demand may continue in the medium term, there is potential for improvement in the supply-demand contradiction between the ore supply end and the smelting end from a marginal perspective. The world's second-largest copper mine, Grasberg, has announced plans to restart and increase production, with production expected to continue to increase in 2026-2027, providing about 1.5% of global copper production. Negotiations for the restart of the Cobre Panam copper mine, a mine under the ownership of First Quantum, are also expected to begin in early 2026. The bank believes that with the gradual removal of disruptions at the ore end in the medium term, the resumption of normal production at copper mines such as Grasberg and Cobre Panam may significantly contribute to the increase in ore supply, easing the supply-demand contradiction between copper ore supply and smelting. Combined with the expectation of the implementation of measures to "reverse internal circulation" in the domestic copper smelting industry, spot processing fees for copper concentrate may improve. The bank is optimistic about the potential for profit improvement in the copper smelting industry under then expectation of easing, and continues to be positive about the marginal increase in ore prices and smelting fees in the medium term. Investment recommendations and investment targets Copper ore end: It is recommended to pay attention to Zijin Mining Group (601899.SH), which has large reserves of resources and has expectations for continued expansion of copper ore production in the medium term. Other investment targets include CMOC Group Limited (603993.SH) and Jchx Mining Management (603979.SH). Copper smelting end: Tongling Nonferrous Metals Group (000630.SZ), one of the largest copper smelting companies in the country, is expected to see an increase in copper concentrate self-sufficiency with the expansion of the Mirador copper mine resources. Other investment targets include Jiangxi Copper (600362.SH). Risk Warning Risks include downstream demand for copper being affected by macroeconomic fluctuations, the implementation of measures to "reverse internal circulation" in the copper smelting industry falling short of expectations, and the progress of medium-term copper smelting production exceeding expectations.