LONDON (Reuters) - Scrap accounts for a little less than a third of the global copper market but, according to Goldman Sachs, its impact on price has been “misunderstood or neglected” because of its opacity.
The Wall Street heavyweight this month published “A Primer on Copper Scrap” - a sign that this previously hidden component of the supply chain is assuming ever-greater significance.
That’s down to China, the world’s largest buyer and processor of copper scrap, or “solid waste” as it is officially classified in China.
The terminology is important, since copper scrap has been caught up in a broader campaign against “foreign garbage”, a catch-all description that encompasses everything from used plastic to paper and textiles.
China’s steady tightening of its “solid waste” import regulations has already upended global flows of copper scrap.
Further upheaval is coming as Beijing drives towards a stated goal of zero “waste” imports. Unless, that is, China’s policymakers can be persuaded that scrap isn’t waste.
China last year banned the import of what it calls Category 7 copper scrap, typically lower-grade material such as radiators and engine motors that need to be physically dismantled before the metal can be extracted.
Import volumes plunged to 2.4 million tonnes from 3.6 million tonnes in 2017, though a rise in implied purity levels, calculated from the dollar value of scrap imports, translated into a smaller hit in terms of contained copper.
Shipments from low-grade scrap suppliers such as the Philippines almost disappeared. The country was the sixth-largest source of China’s copper scrap imports in 2017. Last year it was 18th.
The trend has accelerated in the first two months of this year, with gross import volumes sliding another 27 percent and implied purity levels rising further.
Malaysia has emerged as this year’s top supplier of scrap to the Chinese market, attesting to how international trade flows are being reconfigured.
China’s top copper scrap source has historically been the United States, which has shipped both high-quality and lower-grade material, the latter via Hong Kong.
However, the combination of the Category 7 ban and retaliatory tariffs on U.S. copper scrap saw shipments to China implode from 688,000 tonnes in 2017 to 275,000 tonnes last year, according to the U.S. Census Bureau.
Exports to Malaysia, by contrast, mushroomed from only 5,600 tonnes in 2017 to 119,000 tonnes last year. This export flow is going to Malaysia to be dismantled so higher-quality material, so-called Category 6 scrap, can be sent to China in accordance with the new regulations.
The implied purity content of U.S. shipments to Malaysia averaged 43 percent last year. The purity of what Malaysia has shipped to China in the first two months of this year averaged 88 percent.
Malaysia seems to be hub of the off-shore purification business, but higher-volume U.S. exports to other Asian countries, such as Thailand and Taiwan, suggest it is not the only emerging transhipment point for scrap.
The scrap supply chain to China faces more disruption this year with a further clampdown on “foreign garbage”.
The Ministry of Ecology and Environment announced in December 2018 it was placing Category 6 scrap on the restricted import list from July 1 this year.
This looks like a re-run of what happened to Category 7 scrap, another tightening of the import rules pre-empting a complete ban as Beijing works towards an end-2020 goal of restricting all imports of metallic scrap below 99 percent purity.
This is a major headache for China’s domestic copper sector; both refiners who use scrap as raw material input and manufacturers who blend scrap into their products.
The goal of building a sustainable domestic scrap supply chain is laudable, but achieving it is probably several years away, leaving a short-term hole in China’s copper import picture.
A discreet lobbying campaign is building momentum within the country to try to reclassify higher-grade copper scrap as a way of removing it from the “garbage” hit-list.
The Chinese copper sector finds itself in a terminological trap.
Only China classifies copper scrap as Category 6 and 7. As U.S. recycling association ISRI pointed out in a submission to the World Trade Organization, there are more than 150 specifications for non-ferrous scrap, each with its own code word, description and maximum allowed impurities.
“There is no other country in the world that uses its own set of standards as a ‘pass/fail’ test for imports,” it said in its critique of China’s scrap policy.
And only China classifies copper scrap as “solid waste”, placing it in the same noxious category as single-use plastics.
As long as it is classified as waste, it’s heading for a near total ban, such as already implemented for scrap plastic, because that’s what Beijing has decreed.
The trick, therefore, is one of persuading Beijing that, to quote ISRI, using the word “waste to jointly refer to unusable waste and valuable scrap is confusing”.
Rarely has a single word caused such international trade disruption.
The impact of China’s rule changes on copper scrap is already feeding into the refined segment of the supply chain.
Last year’s reduced imports boosted Chinese usage of refined copper, but by how much is difficult to quantify given the opacity surrounding the sector, particularly in China.
Goldman suggests that global copper scrap supply fell by 400,000 tonnes last year, significantly offsetting better than expected mine supply and keeping the refined copper market tighter than expected.
Scrap can be viewed as “the world’s largest copper mine”, according to the bank, and one that, unlike other mines, can respond quickly to changes in demand.
New mines can take 5-10 years to bring online. Scrap supply can respond, both to higher and lower prices, in a matter of months.
That’s why the argument within China over whether copper scrap is “solid waste” or a valuable resource is important.
Without a change of name, Beijing is moving towards stopping all imports from the world’s largest and most responsive copper mine.
— The opinions expressed here are those of the author, a columnist for Reuters —
Editing by David Goodman