Copper scrap deficit weighs on China’s red metals sector

Copper scrap deficit weighs on China’s red metals sector

Recyclers may need to ramp up offshore investments to keep Chinese smelters fed.

October 18, 2018

Scrap recyclers in North America, Europe and other parts of the world who spent two decades shipping red metal scrap to China have acknowledged the disruption caused by China’s sudden restrictions on imported scrap.

The Communist Party of China is less direct in acknowledging difficulties—especially regarding something caused in part by its own decisions—but metals industry analysts are seeing negative consequences for that nation stemming from its import barriers.

Reuters columnist Andy Home, in a mid-October online commentary, says the import bans are a contributing factor in an unexpected global copper supply squeeze that has hit Asia hardest.

Home says inventory levels are low on the Shanghai Futures Exchange (SHFE), the London Metal Exchange (LME) and the Chicago-based COMEX market. While exchange pricing may not be booming, “Physical premiums are rising,” adds Home.

Copper producers, sellers and buyers in Asia, continues Home, are still in the process of “adapting to a combination of smelter outages and changing scrap dynamics.”

He continues, “China’s new restrictions on the purity of copper scrap imports caused a drop in the flow of material from the rest of the world, [and] the effect was compounded in August with the imposition of 25 percent tariffs on scrap from the United States.”

Most of the scrap imported into China been used to make refined copper, says Home, so the scrap had fed “back into the refined metal balance very fast in China.” The disappearance of this feedstock “is adding to the broader squeeze on availability [of finished copper] in the region,” he concludes.

Scrap is not the only factor, with air pollution concerns and unexpected smelter repair problems in Asia also playing a role, according to Home.

A late October news item from Bloomberg, based on an interview with an executive from Hong Kong-based global metals recycler Chiho Environmental Group Ltd., indicates that firm is planning to invest in motor and other copper-bearing scrap recycling operations in nations other than China.

Goh Kian Guan, that company’s chief investment officer, told Bloomberg Chiho is convinced China’s anti-scrap import mentality is long-term, but copper smelters and copper and brass producers in China continue to need red metal scrap. Chiho operates scrap yards in Europe under the Scholz brand and in North America under the Liberty Iron & Metal brand.

In 2017 and 2018, many small and medium-sized Chinese recycling firms have already relocated processing operations to a range of nations, including Malaysia, Vietnam, Thailand, Taiwan and Japan.

Rumors swirling in the Chinese scrap market indicate Japan and Taiwan are gaining favor as destinations for upcoming relocation investments. Many entrepreneurs are concerned that governments in Malaysia, Thailand and Vietnam have shown the same tendency as China to make sudden policy changes that could leave them with stranded investments.

Although labor challenges and strict regulations exist in Taiwan and especially Japan, their governments are considered to be far less likely to make sudden shifts in scrap import policies either in response to China’s government or because of scrutiny from anti-scrap export advocacy groups.

Similar conclusions were reached by London-based CRU Group in late July, in an online analysis posted at that time.

CRU’s Ibrahim Yucel and Willis Thomas wrote at that time that copper producers in China were already stating their intentions to relocate some production offshore “to use lower cost labor in other regional jurisdictions to process [nonferrous scrap], smelt the sorted material and then export the pure copper and aluminum.”

While such transfers are already occurring, with plants reopening in Malaysia, Thailand and other nations, “Limits to the speed of capacity development and logistical/technical difficulties will raise the overall costs of using scrap as an input in China when processing through these markets,” the duo predicted.

Both Home and the CRU analysts point out that China’s government has indicated that beyond tight scrap purity restrictions already in place, the nation may ban all scrap imports by the end of 2020. Writes Home, “No one is believing them. The country imported 1.6 million metric tons of contained copper in scrap [in 2017], according to research house CRU. It’s simply too big a gap to fill without causing mayhem in the refined metal part of the supply chain.”

In the meantime, he remarks, “The appearance of more smelter bottlenecks will overlap with the potential for more upheaval in the copper scrap chain.”