LONDON, March 15 (Reuters) - The copper market has

awoken from its year-long slumber.

London Metal Exchange (LME) copper surged by 3.1% on

Wednesday, breaking out of its long-standing range. The move

extended on Thursday morning to an eleven-month high of

$8,976.50 per metric ton.

The trigger for the price break-out is news that China's

copper smelters have agreed to curb output in response to a much

tighter-than-expected raw materials market.

Spot treatment charges, which are the fees smelters earn for

converting mined concentrates into metal, have collapsed in

recent weeks as too many buyers chase too little material.

As the world's largest buyer of concentrates, China is

particularly exposed to the resulting squeeze on smelter

margins.

China's collective reaction has turned the market's

attention from weak global demand to copper's stressed supply

dynamics.

But to what extent it translates into less refined metal

supply remains to be seen.

CONCENTRATES SQUEEZE

Smelter treatment charges say a lot about what's happening

in the upstream segment of copper's supply chain and right now

they're flashing red warning lights.

Spot charges in China tumbled to $11.20 per ton last week, a

near 76% drop in just two months and the lowest level since

2013, according to price reporting agency Fastmarkets.

The implosion in processing fees speaks to an acute

shortfall of concentrates in the spot market.

The unexpected closure of First Quantum's Cobre

Panama mine at the end of last year has blown a 350,000-ton hole

in China's copper supply chain.

Some Chinese producers are insulated by annual supply deals,

which were priced at a benchmark treatment charge of $80 per ton

for this year's shipments.

Others, particularly newer operators, are more dependent on

spot supply and have evidently been scrambling to buy

replacement tonnage, chasing treatment charges down to

unprofitable levels.

In January China's Nonferrous Metals Industry Association

(CNIA) advised the country's copper smelters they needed "to

bring maintenance ahead of schedule or extend the maintenance

time, to cut production and to postpone the commencement of new

projects."

Which is what they agreed to do this week at a well-flagged

meeting to discuss the unfolding crisis. The collective

commitment to curb output is intended to safeguard the "healthy

development of (the) global copper smelting industry", according

to state research company Antaike.

TOO MANY SMELTERS

There are no quotas for production cuts among the 19 Chinese

operators at this week's rare meeting. Rather, each producer

will make their own assessment of what needs to be done.

In some cases the action has already likely been taken with

maintenance downtime brought forward and unprofitable lines

shuttered.

An average 11.5% of global smelting capacity was off-line in

the first two months of this year, according to Earth-i, which

uses satellite imagery to monitor plant activity rates. This is

up from 8.6% last year and 8.0% in January-February 2022.

Tellingly, inactive capacity in top producer China averaged

8.3% this year, up from 4.8% last year, a much sharper jump than

in the rest of the world.

Some Chinese producers, it seems, either voluntarily heeded

the CNIA's January call for sector restraint or were forced to

by market reality.

Moreover, any promised curbs to output must be seen in the

context of China's rapid build-out of copper smelting capacity.

Treatment charges reflect not just the state of mine supply

but also the volume of smelter demand.

China started up 780,000 tons of annual smelter capacity

last year with another net 150,000 tons due this year, according

to analysts at Macquarie Bank. ("Commodities Comment," Jan. 16,

2024)

Macquarie estimates another two million tonnes of new or

expanded capacity is also due to ramp up outside of China this

year, increasing the pressure on concentrates availability.

Freeport McMoRan's ( FCX ) new Indonesian smelter, for

example, will at full capacity soak up 1.7 million tons of

concentrates, material that until now has been available for

export.

The dramatic collapse in processing fees is as much a

function of this new call on raw materials as it is of mine

supply problems.

SENTIMENT SHIFTS

China's production restraint may slow but is unlikely to

reverse the country's recent rapid output growth.

The country's production of refined copper jumped by an

eye-watering 13.5% year-on-year to 12.99 million tons in 2023,

according to the National Bureau of Statistics.

And while analysts have adjusted their market balance

estimates to factor in recent mine losses, most still think the

refined market will be in supply surplus this year, albeit to a

smaller extent than previously thought.

But market sentiment has palpably shifted.

The weak state of global manufacturing activity, not least

in China, has kept copper locked in a sideways trading range for

much of the last year.

Macro drivers, particularly interest rate expectations, have

dominated the choppy price action.

The concentrates squeeze has refocused attention on copper's

micro dynamics of stretched supply and chronic under-investment

in new mines.

Copper's bull narrative has just been reactivated, even if

China's collective commitment to curb output may promise more

than it delivers.

The opinions expressed here are those of the author, a

columnist for Reuters.

(Editing by Sharon Singleton)