China set a new record last year in terms of how much copper it sucked in from the rest of the world.
Imports of refined metal reached 3.75 million tonnes, up 16 percent from 2017 and eclipsing the previous high of 3.68 million tonnes registered in 2015.
New smelting and refining capacity continues to be built and there was no shortage of mined concentrates to feed it last year thanks to a robust performance by the world’s copper mines.
China also imported more copper concentrates than ever before, close to 20 million tonnes in gross weight terms.
In part, the explanation for China’s increased call on units from the rest of the world is one of simple restocking after relatively weak imports in 2017.
In part, however, it’s also down to scrap, the often overlooked component of the copper supply chain.
Copper scrap imports slumped last year as Beijing tightened purity rules on the type of material it is prepared to accept, part of a broader campaign against “foreign waste”.
And with more rule changes coming this year, scrap will remain the wild card in China’s copper import picture.
SCRAP DISRUPTION
Imports of copper scrap fell by 32 percent to 2.4 million tonnes gross weight in 2018, the lowest headline figure this century.
This was by no means unexpected.
China had flagged in advance its intention to ban imports of what it calls Category 7 scrap at the end of last year.
Category 7 scrap covers a broad spectrum of materials. Much of it, such as radiators and engine motors, needs to be physically disassembled before the metal can be extracted. All of it is relatively low-grade, typically containing below 70 percent copper and often a lot less than that.
Although the ban kicked in only at the end of the year, import restrictions and tighter regulatory oversight began with the first round of 2018 import licenses.
A step-change in the sort of scrap entering China quickly became evident. Average copper content jumped from 42 percent in 2017 to around 60 percent last year, according to analysts at Refinitiv.
On paper, last year’s year-on-year change in terms of how much copper was contained in China’s scrap imports was marginal.
In the real world, however, the clampdown on Category 7 flows caused significant supply-chain disruption, which was compounded by China’s imposition of tariffs on imports of scrap from the United States, a key source of higher-purity material.
Scrap has a double impact on the refined metal segment of the copper market. It is used both to make new metal via secondary refining and as a direct-melt input into first-stage processing into copper products.
Analysts at Barclays Capital, citing research by Wood Mackenzie, note that while total copper consumption increased by 2 percent last year in China, demand for refined metal rose by 5 percent.
“This implies a decline in scrap consumption in the semis industry of close to 300,000 tonnes,” according to Barclays. (“Metals Magnifier”, Jan. 24, 2019).
The follow-through inference is that Chinese consumers built stocks of both refined and scrap copper to cushion the impact of the scrap rule changes.
That accentuated a broader cyclical stocks build that followed a year of destock in 2017. Imports of 3.2 million tonnes of refined copper that year were the lowest since 2013.
MORE DISRUPTION IN 2019
The scrap disruption effect is only going to intensify this year.
Beijing has moved imports of higher-quality Category 6 copper scrap to the “restricted” list of commodity imports effective July 2019.
They are not yet banned, and there are even hopes that the highest-quality material might still be exempted, but quotas, restrictions and tougher inspections start applying in six months’ time.
Most analysts expect a preemptive surge of Category 6 scrap to enter China ahead of the July deadline. This is what happened with Category 7 material, imports from countries such as the Philippines and Thailand accelerating in 2017 as importers rushed to beat the clock.
Not everyone agrees, however.
Analysts at research house Roskill argue that such a surge is “unlikely”. (“Copper: Chinese copper scrap consumers boost imports in December ahead of new restrictions”, Jan. 28, 2019).
Firstly, there is the problem of the extra tariffs on copper scrap from the United States, the single biggest source of high-purity material in the first half of 2018.
Imports from the United States unsurprisingly slumped over the second half of the year and despite a small bounce in December seem unlikely to recover to pre-tariff levels any time soon.
Moreover, Roskill argues that Chinese customs’ current inspection focus on transshipments reduces the potential for U.S. scrap to enter China indirectly via Hong Kong.
Secondly, the global recycling industry is still reacting to last year’s Category 7 restrictions by building new shredding and granulation capacity.
The lead time on such investment, typically two to four years, “means that the international recycling industry has no chance of being ready for the start of (new) restrictions in July 2019”.
The pace of Chinese scrap regulation, in other words, is running ahead of the rest of the world’s ability to adapt.
Scrap is once again the known unknown in the bigger Chinese copper import picture.
If the consensus about a preemptive rush to get scrap into China ahead of July is right, it implies a softening in demand for copper in other forms, whether concentrates as feed for refineries, or refined copper at the semi-manufacturing stage of the supply chain.
However, if Roskill is right, Chinese demand for both concentrates and refined metal will be stronger than expected.
Only time will tell.
And talking of timing.
China’s crackdown on “foreign waste” isn’t stopping any time soon. Beijing is proposing a ban on all scrap of less than 99 percent purity at the end of 2020.
No one in the recycling industry thinks that is realistic. However, given the speed and scale of rule changes over the last two years, no one should doubt Beijing’s ability to disrupt further global copper scrap flows.
