Copper-bottomed innovation?

The young Cui Zhixiang saw an opportunity. China was going to need a lot more copper and by the time he had risen through the banking ranks to a directorship of an executive office (with some handy experience in commodities lending), he took the unusual step of stepping off a promising career ladder to launch Dongying Fangyuan in 1998.⁽¹⁾

Initial capitalisation came from his personal wealth and that of a business partner in Singapore. Li Yujun, the company’s Chief Financial Officer (whose first job was also in banking – at Bank of China) told flow how their founder’s move from banking to entrepreneur “gave us a lot of inspiration”. Cui Zhixiang’s entrepreneurship and leadership charisma was a deciding factor for his own decision to leave banking “for a career opportunity that would apply my finance and accounting knowledge in a real economy business”. Li Yujun had qualified as a chartered accountant.

However, the banking sector has been an important part of Fangyuan Group’s continued growth trajectory and with these two key executives as former bankers, a pattern began to emerge about working with banking partners that could adopt the innovation mindset – while of course managing the risk.

Based in Shandong, the company started out with 10,000 tonnes of refining capacity. Although this was small, it was, says Li Yujun, “meaningful tonnage for China at the time”, and this output had doubled by 2003. Domestic copper demand continued its unabated voracity. To keep up, Dongying Fangyuan’s capacity then catapulted to 200,000 tonnes between 2003 and 2006. Revenues rose from CNY600m in 2004 to CNY17bn in 2009.

ICBC was the first bank to support the company with a CNY30m project financing in 2003, and as the business grew further, other banks started to come into the fold. BNP Paribas was the first foreign bank to provide a facility (2009), and it was Deutsche Bank that was first to the table with a clean facility (without being tied to collateral such as property assets) in 2010.

The relationship had its roots in more traditional flow trade finance before the structured commodity trade finance (SCTF) became the preferred financial artillery because, in the words of Frank Wu, Deutsche Bank’s Regional Head of Structured Commodity Trade Finance, Asia Pacific, “we could arrange syndicates”.

In 2016, the US$385m pre-delivery financing syndicated offshore took advantage of the group’s Short-Term Foreign Debt Quota (STFDQ) under China’s new cross-border foreign currency cash-pooling scheme.⁽²⁾
It had successfully tapped the syndication market in each of the preceding two years.

The Deutsche Bank-led US$145m three-year onshore transaction in June 2015 had established the Chinese producer’s profile in the SCTF market, and enhanced its reputation with major international commodities trading houses such as Trafigura and Mercuria. So, it was no surprise that once the opportunity was opened out to foreign banks, the 2016 deal was oversubscribed.

These sorts of deals do much to engage the client team as well. When asked what he enjoyed most about his role at Fangyuan Group, Li Yujun enthuses, “The opportunity for lifelong learning.” He adds, “When Fangyuan first engaged in international business in 2007, the experience of dealing with international traders and banks was an absolute revelation.”

Extracted from oxide and sulphide ores that typically contain between 0.3% and 2% copper, the barriers to entry in the copper processing industry are pretty high. It is a complex, messy and expensive process to turn the ore into copper cathode – the form it needs to be in before the metal can be used.

China has very few reserves of ore; most of the world’s supplies are concentrated in Chile, with some in the United States and sub-Saharan Africa (Zambia in particular). Given that the Middle Kingdom consumes around 40% of them, it was hardly surprising that it wanted to ensure access. Copper underpins Chinese infrastructure – it carries water, conducts electricity and is a vital component in machinery circuits.

When Cui Zhixiang founded Dongying Fangyuan, China did not have its own smelting technology and it had to purchase it from overseas. Most Chinese smelters bought the technology from Finland’s Outotec, progenitors of the “double flash” technology comprising flash smelting and flash converting. “While this is an efficient and low-cost technology, it demands high-grade copper concentrate as feedstock,” explains Li Yujun.

The Fangyuan plant began by refining scrap, but when demand picked up, the shortage of copper scrap presented a huge problem. “We needed to diversify our raw material sources to concentrates, so we needed new equipment and technology. Importing technology would mean expensive licensing fees so we chose to look for proper technology inside and to develop it,” Cui Zhixiang told Metal Bulletin. It was a case of innovate – or die.

Transformational to the business was the development of Fangyuan’s proprietary oxygen enriched bottom-blowing smelting (BBS) technology. This makes it possible to extract more than ten metals such as copper, gold, silver and nickel from soot and anode mud. In addition, it is used to process complicated raw ores such as low-grade and high-grade copper ores, replacing the cyanide process in the extraction of gold and silver.

Importantly, the technique is more environmentally sound. While delivering 15% of energy savings for polymetallic extraction, emissions are minimised.

Lufang was registered as a second entity in 2006 so that what became the Fangyuan Group could enter the smelting business further upstream (refiners buy copper blister from smelters). Li Yujun reflects, “This made it possible to introduce foreign shareholdings to take advantage of preferential tax treatment for foreign-invested enterprises. Also, our founder was not sure if the new smelting technology would succeed on an industrial scale, so we were careful. The new entity would ensure the smelting business was separate from the refining business.” In other words, if Lufang failed, it would not drag Fangyuan down with it.

Ten years on, it is clear the risk paid off. Today, Dongying Fangyuan and Lufang are both integral parts of the group with separate but complementary functions. Lufang is a fully integrated copper smelting and refining operation, from concentrate through to cathode. Fangyuan continues to focus on refining, but at the same time runs the group’s peripheral logistics business.

For example, a bonded warehouse in Dongying Port helps streamline transportation and customs clearance. Fangyuan also hosts the group’s R&D centre, which continues to optimise the proprietary BBS technology.

The BBS technology’s fame spread quickly. Spotting an opportunity for diversification, the group took the decision to export the technology, licensing its use to important partners such as Codelco, Chile’s state-owned copper mining company. “This helps us forge a tighter relationship on the procurement side,” explains Li Yujun when flow expresses surprise at this generosity with trade secrets.

Another more recent development is the export of copper cathode under tolling licence. Although most copper cathode production is destined for domestic use, a more flexible attitude from the Chinese government on managing copper market surpluses has resulted in unprecedented levels of copper cathode exports.

By the third quarter of 2016, China had exported 363,141 tonnes of copper cathode, “a 126.8% year-on-year surge”, noted Metal Bulletin on 31 October 2016.

Fangyuan Group is registering with the London Metals Exchange and this, says Deutsche Bank’s Frank Wu, sets up an ideal opportunity to build on the existing deal flow in the syndicated lending market and to go on to structuring pre-export finance and pre-payment financings.

One might ask where this nimble producer is heading next. When asked if the group has plans to expand capacity even further, Li Yujun declares, “No. The focus is to continue optimisation and innovation.
We are already the largest privately owned and one of the most efficient smelters in China.”

Like the best entrepreneurs, these guys do not rest on their laurels. They have proved they can invent unassailable technology, and the plan is to develop an export market for this and build a service business to go with it. Mindful of environmental impact (nitrogen oxides and sulphur dioxide being inevitable waste products of smelting), another priority is continued efficient recovery of economic metal content in concentrate (such as silver and gold) with a view to recycling as much as possible with minimal discharge waste.

During the Qin Dynasty in 221 to 206 BC, Emperor Qin Shi Huang unified the country’s currency system with copper cash. One would like to think his innovation lives on in this landmark copper processing technology development.

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Sources

⁽¹⁾ US Geological Survey National Minerals Information Center. See http://stanford.io/2kMujxD
⁽²⁾ See http://bit.ly/2mIRZFo at http://cib.db.com