In the first two months of 2021, China's copper scrap imports surged
by 60% year on year to 191720 tons.
A new import system to reclassify scrap iron as a "resource" came into
effect last November, removing high-level copper recyclables from the
currently banned list of "solid waste".
China has always been the world's largest buyer of copper scrap, but as
China's customs authorities steadily tighten the purity threshold of
metal scrap during 2018-2020, imports seem to be in danger of
disappearing completely.
The new customs code should lead to a rebound in imports, reducing
China's demand for refined copper this year.
Trading volume will also pick up, as a significant one-year rise in
copper prices will stimulate fluctuations in global copper scrap.
As prices rise, how much scrap copper flows into the supply chain will
determine when and how tight the global refined copper market is.
Business as usual?
In the past three months, China's copper scrap imports averaged 103000
tons per month, up from 76000 tons in the three months before the
customs code adjustment in November last year.
The new system was originally scheduled to be launched in July last
year, but the delay and persistent initial problems may restrict imports
in the short term. In addition, the disruption of the shipping industry
in the past year, as well as the specific problems related to China's
container transport, will also have the same impact.
Having said that, the new import tolerance is larger than many expected,
and China's metal recycling agency has just authorized 26 other foreign
suppliers to supply scrap copper to China.
This suggests that imports should continue to accelerate this year, but
international waste trade is unlikely to return to the level before
China began to close its exports in 2018.
Direct imports will not return to their peak levels in the early part of
the last decade, when China imported more than 4 million tons of scrap
copper a year.
A large part of this amount is exaggerated by lower grade materials,
which are now not allowed to enter the country even under the new
customs regulations.
In addition, trade flows have changed over the past few years, with
lower grade waste passing through Malaysia, where it is classified and
upgraded to higher quality materials or copper ingots before being
shipped to China.
Malaysia is currently China's largest supplier of scrap copper,
accounting for 18% of China's total imports of scrap copper last year.
The United States, once a major supplier to China, accounts for only
11%. Last year, China exported more scrap copper to Malaysia than China.
China has actually moved its lower grade scrap business overseas, while
Malaysia's scrap upgrading center looks set to continue.
Change the balance
Copper scrap has been a key component of China's supply situation for
many years, which is why China's copper industry vigorously resisted and
finally successfully resisted the comprehensive import ban.
When imports fall, both the quantity of secondary refined metals and the
quantity of "direct melting" materials used by product manufacturers
will decrease, forcing buyers to turn to refined metals.
Combined with several factors, China's imports of smelting metals
surged, increasing by 1.1 million tons last year to a record 4.7 million
tons.
COVID-19's strong rebound in manufacturing activity after infection,
related supply chain replenishment stocks and strategic procurement by
state agencies all played a role.
Last year, China's import of waste materials fell by 37% to 943000 tons.
In 2019, any offsetting of high-purity waste has been largely used for
consumption as all wastes except the highest content are banned.
As a result, 550000 tons of bulk imports fell year on year, causing a
significant supply shock to China's copper industry.
On the contrary, the substitution effect on refined copper market will
be weakened with the acceleration of scrap copper import.
Waste storm
This relationship between scrap copper supply and refined copper demand
is not only a Chinese phenomenon, but also a global phenomenon.
Copper recovery, whether directly into products or processed in
refineries, accounts for about 30% of the global copper consumption
every year.
The lower the price of metal scrap, the less raw metal needed to balance
the market. According to Morgan Stanley, the global penetration rate of
scrap metals has increased by 1%, equivalent to about 300000 tons of
primary metals (copper and renewable energy, March 23, 2021).
The biggest single factor driving scrap metal supply is price. Higher
prices have stimulated the recycling and disposal of scrap.
According to the International Copper Study Group, in 2006, the amount
of scrap used to smelt new metals increased by 20%, while the price of
copper almost doubled. Copper prices continued to rise during the boom,
peaking at another 25% between 2010 and 2012.
According to the organization, the fall in copper prices in 2005 led to
a 10% drop in copper production by 2016.
History suggests that a new surge in copper scrap is imminent, as the
price of copper on the London Metal Exchange has more than doubled since
last March's low of $4371 per ton on the coved-19.
For analysts such as Morgan Stanley, this is one reason to be cautious
about the outlook for copper in 2021. The bank expects $8488 a ton in
the fourth quarter, lower than LME's current price of $8780.
Citi, which is calling for a "copper super cycle", does not believe that
the supply of scrap copper can be expanded enough to fill the supply gap
of 500000 tons this year.
Based on the previous model, the bank studied seven possible scrap
supply scenarios and concluded that only one scenario - a repeat of 2012
- could produce enough raw materials to fill the gap. (super cycle
sunrise Part 3, March 23, 2021)
"We believe that this is an extension and is unlikely to be as fast as
the market needs because of logistics constraints and we find that there
is often an eight month lag between a stronger copper price and the
growth of scrap copper exports," Citi said
Due to the lack of data on the scrap copper industry, these figures are
inevitably ambiguous, as is the calculation of the impact of follow-up
actions on the refined copper market.
But there is no doubt that scrap copper, one of the most powerful
balancing mechanisms in the copper market, will recover. The trend of
copper market in the next few months will depend on the strength of the
market.