* Refined metal producers in China get hit the most
* May cut output at least 100,000 T this year in China
* Fabricators in China, Europe switching to metal to replace
By Polly Yam and Maytaal Angel
HONG KONG/LONDON, May 10 A shortage of copper
scrap is expected to cut China's production of refined metal by
at least 100,000 tonnes this year, which could help shift the
global refined copper market back into deficit in 2013 from a
forecast small surplus.
The unexpected shortfall of scrap -- the feedstock for about
a third of China's copper output -- has already lead a number of
Chinese smelters to cut production of refined copper, and forced
some fabricators to turn to refined metal instead of scrap.
A return to a deficit would cushion international copper
prices, which have fallen about 7 percent so far this
year amid a sluggish global economy, and also encourage
end-users to rebuild stockpiles.
"The copper scrap shortage will affect production in China
this year, for sure," Wu Yuneng, vice president of Jiangxi
Copper Company Ltd , the top refined metal
producer in China, told Reuters in a recent interview.
Wu said China's 2013 refined copper output -- initially
forecast by state-backed research firm Antaike to rise by
500,000 tonnes to 6.1 million tonnes -- may be flat.
More than 30 percent of total copper consumption in China
comes from copper scrap, making the scrap material a vital part
of supply and demand in the world's top producer and consumer of
The International Copper Study Group, an inter-governmental
group, forecast the copper market will post its first surplus
since 2009 this year, as new and expanded smelters across China
and Africa come onstream.
However, announced cuts by smelters, including top producer
Jiangxi Copper, Yantai Penghui Copper Industry Co Ltd and North
Copper, totalled nearly 40,000 tonnes in the second quarter
Unreported closures by others and reduced run-rates by
smaller producers in the southern province of Guangdong, a key
destination for scrap imports, means the impact is far greater.
"We may adjust down the growth of refined copper production
this year by 100,000 tonnes," Yang Changhua, senior analyst at
state-backed research firm Antaike said, adding that the scrap
shortage was unlikely to improve for the rest of the year.
The economic slowdown in developed nations has reduced the
global supply of copper scrap, typically sourced from old
buildings, used electrical cables and power generators, as new
building has slowed.
Supplies were further hit in April after benchmark
three-month LME copper prices hit their lowest in 1-1/2 years,
falling below $6,800 a tonne.
Scrap supplies tend to dry up when copper prices fall, as
merchants who bought the material at higher prices are unwilling
to sell at a loss, while others hold on to the metal in hope of
"Now the scrap traders won't sell, the Chinese are buyers
and the market is empty. This is completely different from 3
months ago when there was scrap available at every corner with
good discounts," said a senior LME trader in London.
A trader at an international trading house said the firm's
supply of copper scrap had fallen 40-50 percent from January.
Copper scrap with more than 94 percent of the metal is
selling at discount of about $150 to LME prices, down from over
$200 in January, the trader said, adding that Chinese refined
metal producers would make losses buying scrap at these prices.
Adding to the shortage, China's customs have stepped up
checks on imports of scrap metal as part of a battle against
pollution, prompting importers to reduce orders of low-grade
scrap by a fifth and encouraging firms to hold on stocks.
Scrap sellers may increase selling if LME copper prices rise
above $7,500 a tonne, trade sources said.
SWITCHING TO REFINED COPPER
Unplanned production cuts could force some refined copper
producers in China to buy spot metal in the domestic market to
make up for refined copper term shipments, traders said.
It is unclear how much refined copper would be used to
replace scrap but Chinese fabricators, which use both refined
metal and scrap to produce semi-finished or finished products
and consumed scrap containing about 800,000 tonnes of copper
last year, are switching to refined metal.
"We've switched to refined metal in April because of the
shortage," said a Shanghai-based trader at an alloy producer.
"Prices for refined metal and scrap are almost the same now."
Copper stocks monitored by Shanghai Futures Exchange
CU-STX-SGH fell 21 percent from late March to 195,043 tonnes
Jiangxi Copper's Wu said some of the firm's clients has
stepped up purchases of refined copper to replace scrap.
In Europe, the scrap shortage has already boosted demand for
refined metal, helping to double metal premiums to above $100
per tonne from February.
"People who have to feed their furnaces are looking for
off-grade materials, or substitute for scrap. If they cannot get
it, they usually go for grade A registered material," said the
LME trader in London.
In the longer term, the prospect of a deficit market could
encourage more buying and increase prices.
"If the market turns to a deficit, end-users will rebuild
stocks of refined copper, boosting prices," said Jing Chuan,
chief research at Citic Futures. "Demand in China has improved
but end-users are still buying refined metal hand to mouth."
(Additional reporting by Melanie Burton in SINGAPORE and
Harpreet Bhal in LONDON; Editing by Fayen Wong and Richard