June 26, 2015 / 11:51 AM / 5 years ago

Why are China's copper scrap imports in long-term decline? Andy Home

LONDON (Reuters) - China has imported 1.4 million tonnes of refined copper so far this year.

That may represent a decline of 12 percent, or around 200,000 tonnes, from last year’s equivalent level. But last year was one of all-time record imports. And 1.4 million tonnes is still a whole lot of metal.

China, in other words, remains the single most important influence on physical refined copper flows, although that doesn’t make interpreting those flows any easier.

Copper for collateral financing is a much diminished trade after the Qingdao port scandal but it is still a driver of imports, blurring the lines between financial and manufacturing demand.

Then there is the “normal” stocking and destocking cycle in China’s copper manufacturing chain coupled with “normal” buyer switching between term and spot purchases.

And last but by no means least is the fact that China’s pull on refined copper from the rest of the world is being eclipsed by its pull on copper raw materials.

Imports of copper concentrates have been trending sharply higher over the last couple of years thanks to much improved global mine supply.

The more raw materials China processes itself, the less copper it theoretically needs in the form of refined metal. For this reason many analysts suspect this year’s decline in refined copper imports may be the start of a structural change in trade patterns.

But what about scrap, the third often overlooked component of China’s copper import appetite?

Because while copper concentrate imports are booming, those of secondary metal appear already to be in long-term decline.

Why? And what does it say about China’s overall copper appetite?

LONG-TERM DECLINE

China’s copper scrap imports have been steadily falling since 2012.

The country sucked in 4.9 million tonnes from the rest of the world that year. Imports then fell to 4.4 million tonnes in 2013 and to 3.9 million tonnes in 2014.

And they are still falling. The tally over January-May this year was 1.4 million tonnes, down 8 percent on last year.

Indeed, you’d have to go all the way back to 2003 to find such a low import figure for the first five months of any year. These figures, by the way, denote the bulk weight of imports since China’s customs department does not break down the metal content of the scrap.

Scrap of course sits in its own microcosm of supply and demand drivers with supply being sensitive both to price and to the health of global manufacturing.

Simply put, the more the world’s factories produce, the more scrap is generated in the supply chain. It’s noticeable, for example, that China’s copper scrap imports slumped in 2009 as manufacturing activity just about everywhere contracted in the wake of the Global Financial Crisis.

And it’s fair to say that the world’s factories have been humming along in relatively low gear for the last year or so. The International Copper Study Group (ICSG) reckons global scrap use fell around 2.6 percent last year to 8.3 million tonnes.

Moreover, the scrap supply chain is itself changing, reflecting the increased generation of complex electronic scrap and the resulting entry of new players in the e-scrap business.

However, such supply-side drivers do not fully explain why China, the world’s largest purchaser of scrap, is taking ever less material.

PEAK SCRAP?

Rather, something is changing within China in terms of how scrap is used, according to a paper presented at last month’s Metal Bulletin Copper Recycling conference by Carlos Risapatron, ICSG director.

To understand what exactly means understanding how scrap enters the copper supply chain, both in China and everywhere else.

It does so in two ways.

The first is as a raw material for transformation into refined copper by secondary processors. Scrap’s contribution to supply in this way is significant, accounting for around 17 percent of global refined copper production last year.

The second way scrap interacts with copper’s broader supply-demand dynamics, though, is less intuitive. Direct melt scrap is used by copper fabricators as a relatively low-priced raw material to blend with refined metal to make copper products. It won’t work for high-purity end-products but it does just fine for many other applications such as wire rod and alloys.

And it’s this category of scrap usage that is undergoing fundamental shifts in China, according to Risapatron.

Indeed, the ICSG estimates that China’s direct melt scrap usage fell to around 550,000 tonnes last year from 1.2 million tonnes in 2012.

More scrap is still being used by refiners but the drag from the fabricator sector means that China’s overall copper scrap usage may well have peaked in 2011.

In part this is down to a longer-term technology-driven transformation, namely a new generation of wire rod plants that don’t use scrap as an input.

But in part it’s also the flip side to China’s booming imports of copper concentrates.

COMPLETING THE CIRCLE

More concentrates plus more Chinese refining capacity means more domestically-produced refined metal.

And cheaper refined metal, all of it on the doorstep of China’s fabricating sector, has incentivised many fabricators to prefer refined metal over direct melt scrap.

This change of fabricator behavior is a global one, the ICSG estimating that direct melt scrap use fell to 4.4 million tonnes last year from 4.7 in 2013.

But the change is more pronounced in China, simply because more smelting and refining capacity has been built out there than anywhere else in the last few years.

As such, China’s dwindling scrap intake from the rest of the world can be seen as just another bearish manifestation of a market that has moved from chronic mine famine to current feast, however temporary that may prove to be.

But the net result is not bearish at all, since it means heightened demand for refined metal in China.

This missing link in the overall supply chain may help explain why there is incipient tightness in the Chinese copper market even though domestic production is rising, imports are still running strong and real demand is doing not much more than stuttering along, by China’s recent standards at least.

Moreover, as long as scrap imports maintain their downwards trajectory, the displaced demand for copper in refined form may act as a powerful counterweight to any expected structural decline in refined imports.

Scrap may be a diminishing part of China’s overall copper picture, but that doesn’t make it any less significant in terms of understanding the broader dynamics of China’s place in the global copper market.

(The opinions expressed here are those of the author, a columnist for Reuters.)

Editing by William Hardy

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