In 2018, the global copper market faced a dual threat of supply disruptions. Strike actions posed a significant risk to the Lomas Bayas copper mine in Chile, operated by Glencore; meanwhile, the scrap copper industry was shrouded in uncertainty. China’s restrictions on imports of “foreign waste” have already triggered a major uproar in the waste plastics and waste paper sectors, leaving the global copper market under the double threat of supply disruptions.

With one threat eliminated, another one has emerged—by 2018, the global copper market faced a dual threat of supply disruptions.

The Chilean Lomas Bayas copper mine, operated by Glencore, has just averted a strike threat. Union workers accepted the terms of a new labor contract at the last minute. The number of contracts set to be renewed this year has reached its highest level since 2010, with most of these contracts located in Chile and Peru.

The threat of strike action to mine supply is very significant, especially at Escondida—the world’s largest copper mine. Last year’s strike at the mine lasted 44 days. Analysts have all adjusted their forecasts for the extent of supply disruptions, taking into account the potential labor disputes expected this year.

The second threat comes from the murky waters of the scrap copper industry. The scrap copper sector is a crucial link in the supply chain, yet it remains statistically opaque. China’s restrictions on imports of “foreign waste” have already sparked an uproar in the waste plastics and waste paper industries—and now it seems the turn has come for copper. If a series of new measures are fully implemented, they could effectively block the import of scrap copper into China.

Citing Michael Lion, President of Lion Consulting Asia and a veteran in the scrap copper trade, Huitong.com reported: “Even from the most optimistic perspective, severe disruptions and interruptions in the copper supply chain are now unavoidable.”

Rule adjustments

Last July, China announced adjustments to its regulations on the import of scrap copper, injecting new vitality into the copper market. At the time, there was a looming threat that imports of “Category 7 scrap” would be banned starting at the end of 2018. It now appears that the situation remains unchanged: “Category 7 scrap” still remains on the list of items subject to restrictions introduced in 2018. This category of scrap copper includes waste wires, used electric motors, and other similar materials, which must first be disassembled and sorted before being processed further.

Chinese operators have already taken the opportunity to shift the processing of this material to other Asian countries, in preparation for a full-scale suspension of imports. This low-grade scrap copper typically contains around 14-15% copper and accounts for only a relatively small portion of China’s total copper import demand.

More importantly, two other policy adjustments are evident in China’s “Blue Sky” policy aimed at reducing pollution. The first is the systematic elimination of the middleman segment in China’s scrap copper supply chain. On December 15, 2017, China’s Ministry of Environmental Protection announced that, for that year, only end-users and processors of scrap copper would be eligible to receive import quotas. Clearly, traders and intermediaries did not meet the eligibility criteria.

Second, it is recommended that the level of harmful impurities be limited to 1%; only the purest scrap copper will be able to meet this quality threshold. Together, these two regulatory adjustments will virtually bring to a standstill new applications for scrap copper import permits in 2018.

China's imports of scrap copper

China imports over 3 million tons of scrap copper annually. From 2013 to 2016, import volumes steadily declined, partly due to quality-control measures introduced earlier by Chinese authorities and partly owing to the sharp drop in copper prices.

When prices are low, the supply of scrap copper dwindles, helping to balance the market by offsetting the oversupply of high-quality copper. As prices rebound, however, the scrap copper market regains vitality. This has been the general pattern in the copper market over the past year or so. From 2016 to 2017, copper prices rose sharply, and as the discount on scrap copper widened, its supply surged—much of this additional supply was absorbed by China.

Last year, cumulative imports through November increased by 9%, marking the first year-on-year growth since 2012. However, unless China relaxes its new import restrictions, the coming year could well bring a very different scenario. If China fails to do so, it will severely disrupt the supply of scrap copper, thereby boosting demand for refined copper or copper concentrates.

In the first 11 months of 2017, refined copper imports declined by 11%. However, in November, imports unexpectedly surged to 329,000 tons—the highest level since December 2016—and caught the market by surprise. As a result, trade data for the coming months will be closely monitored.

Misalignment and Disconnection

If China is facing a copper scrap famine, other regions around the globe are immersed in a copper scrap feast. The discount on U.S. copper scrap prices continues to widen.

According to S&P Global Platts, the price of “No. 2” scrap copper is trading at a discount of $0.41 per pound relative to spot copper on the Chicago Mercantile Exchange (CME)—a wider discount than the $0.30 per pound discount seen in July. Meanwhile, “No. 1 bare bright” scrap copper is trading at a discount of $0.14 per pound, compared to a discount of $0.08 per pound one year ago. “No. 2” scrap copper typically consists of copper wires and copper pipes that require purification before processing.

At the end of 2017, copper futures on the New York Mercantile Exchange (COMEX) broke above $3.00 per pound, which may have once again spurred the supply of scrap copper. However, this could also be an early sign of a reaction to China’s adjustments in its import policies this year.

The global scrap copper supply chain appears set to enter a period of severe “mismatch and fragmentation,” with China facing a shortage of scrap materials, while elsewhere in the world, scrap supplies continue to rise steadily.

In the medium to long term, market flows are likely to be readjusted. The continued export of relatively highly polluting Class 7 waste from China’s scrap industry may signal that other types of materials will also undergo larger-scale shifts.

China’s own waste generation and disposal chain will develop steadily and become more organized. These processes will take some time, yet China seems to be quite impatient.

Currently, China’s metal scrap industry is under intense scrutiny by regulatory authorities. Whether viewed from a practical standpoint or by way of analogy, this industry is bound to undergo a “cleanup.”

As of the end of November, 259 people had been arrested for smuggling “foreign waste.” Over the past two months, the major ports of Xiamen and Qingdao have both seized prohibited zinc scrap. Authorities have launched wave after wave of official inspections, and in the ongoing “Blue Sky” campaign, China has demonstrated its firm commitment to improving the environment.

By taking a glimpse at the state of the waste-paper industry, we might gain some insight into the copper market’s situation. Import controls on waste paper have already driven Chinese prices sharply higher, and suppliers are hoarding inventory. The scrap-material segment of the supply chain is facing turmoil—and perhaps this turmoil is still far less severe than that confronting mining workers.