In 2018, the global copper market faces the threat of dual supply disruptions. The strike is very threatening to the Chilean Lomas Bayas copper mine operated by Glencore. At the same time, the copper scrap industry is full of haze. China's restrictions on the import of "foreign garbage" have caused an uproar in the waste plastic and waste paper industry, and the global copper market is facing double supply interruption threats. .

One threat is eliminated, but a new threat emerges. In 2018, the global copper market is facing a double supply interruption threat.

The Chilean Lomas Bayas copper mine operated by Glencore just avoided the threat of a strike. The union workers accepted the terms of the new labor contract at the last minute. The number of contracts to be renewed this year is the highest since 2010. Most of these contracts are in Chile and Peru.

The strike action poses a great threat to mine supplies, especially in Escondida, the world's largest copper mine. The mine’s strike last year lasted for 44 days. Analysts all adjusted their estimates of the extent of supply disruptions, taking into account possible labor disputes this year.

The second threat comes from the haze of the copper scrap industry. The scrap copper industry is an important link in the supply chain, but it is not statistically transparent. China's restrictions on the import of “foreign garbage” have caused an uproar in the waste plastic and waste paper industry, and now it seems that it is copper's turn. A series of new measures, if all implemented, may prevent scrap copper from being imported into China.

Huitong.com quoted Michael Lion, president of Lion Consulting Asia and a veteran of copper scrap trading, as saying: "Even from the most optimistic point of view, serious chaos and interruptions in the copper supply chain are unavoidable."

Rule adjustment

China announced in July last year that it would adjust its copper scrap import regulations, stimulating the vitality of the copper market. The threat at the time was that imports of the "abolished seven categories" would be banned from the end of 2018. This still seems to be the case. The "Seven Obsolete Categories" are still on the list of "restricted" entries in 2018. This type of scrap copper includes scrap wires, scrap motors, etc., which need to be disassembled and sorted before processing.

Chinese companies have lost no time to transfer the processing of this material to other Asian countries in preparation for a complete suspension of imports. This low-grade copper scrap usually has a copper content of about 14-15%, which accounts for only a relatively small part of China's total copper import demand.

More importantly, the other two policy adjustments should be seen in China's "blue sky" policy to reduce pollution. The first is to systematically eliminate the middle part of China's copper scrap supply chain. The Ministry of Environmental Protection of China announced on December 15, 2017 that only scrap copper end users and processors would receive import quotas that year. Traders and traders are obviously not eligible.

The second is to limit the level of harmful impurities to 1%. Only the purest copper scrap can pass this quality threshold. The adjustment of these two rules together will almost collapse the new scrap copper import permit application in 2018.

China's copper scrap imports

China imports more than 3 million tons of copper scrap every year. The steady decline in imports from 2013 to 2016 was partly attributable to the earlier quality control measures adopted by the Chinese authorities, and partly to the collapse of copper prices.

When the price is low, the supply of old scrap copper dries up, balancing the oversupply of good copper; when the price rises, the scrap copper chain regains its vitality. This is the situation in the copper market in the past year or so. Copper prices rebounded sharply from 2016 to 2017, and the supply of scrap copper increased sharply after the expansion of the discount for copper scrap prices. China absorbed the new supply.

The cumulative import volume up to November last year increased by 9%, the first year-on-year increase since 2012. But unless China relaxes new import restrictions, the next year may be a different story. If China does not do this, it will have a serious impact on the supply of scrap copper, which will increase the demand for refined copper or copper concentrates.

Refined copper imports fell by 11% in the first 11 months of 2017, but imports unexpectedly rose to 329,000 tons in November, the highest since December 2016, which also exceeded market expectations. Therefore, trade data in the coming months will be closely watched.

Dislocation and fragmentation

If China is facing a famine of scrap copper, then the rest of the world is immersed in the feast of scrap copper. The discount of copper scrap prices in the United States continues to expand.

According to S&P Global Platts, the price of "No. 2" copper scrap is US$0.41 per pound compared to the Chicago Mercantile Exchange (CME) spot copper, and the discount rate is larger than that of US$0.30 per pound in July; "Bright No. 1 (Bare bright) "Scrap copper is at a discount of US$0.14, compared to a discount of US$0.08 a year ago. "No. 2" copper scrap is usually copper wire and copper tube, which needs to be purified before processing.

The New York Mercantile Exchange (COMEX) copper futures rose above US$3.00 per pound at the end of 2017, which may have once again stimulated the supply of scrap copper, but it may also be a preliminary sign of the response to the adjustment of China's import policy this year.

The global copper scrap supply chain seems to be facing the most serious period of "dislocation and fragmentation", China will experience a shortage of scrap, while the rest of the world is steadily increasing.

In the medium to long term, the flow of the market should be readjusted. China's waste industry continues to export seven types of waste with higher pollution, which may indicate that other types of materials will migrate on a larger scale.

China's own waste generation and processing chain will develop steadily and become more organized. These processes will take some time, but the Chinese side seems to be very impatient.

China's scrap metal industry is currently the subject of strong supervision by regulatory agencies. Whether it is from a practical point of view or an analogy, the industry will be "cleaned up."

As of the end of November, 259 people have been arrested for smuggling "foreign garbage". The two major ports of Xiamen and Qingdao have seized banned zinc waste in the past two months. The authorities have carried out wave after wave of formal inspections. In the operations where the blue sky is always present, China has shown a firm will to improve the environment.

A glimpse of the waste paper industry may help understand the situation of the copper market. Import controls on waste paper have caused prices in China to soar, and suppliers are hoarding inventories. The scrap part of the supply chain is facing turbulence, perhaps far less attention-grabbing than the expiration of the mining labor contract. But in terms of price and industry structure, the impact it will cause may be even more far-reaching.