(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)
China’s copper import surge has peaked.
The country sucked in a record 4.67 million tonnes of refined copper last year, making it the single most important physical driver of the pandemic recovery rally.
This year, the import pulse has slowed, with volumes sliding by 10% over the first half and the monthly total dipping below 300,000 tonnes in both May and June.
High prices and Beijing’s attempts to fade last year’s stimulus have taken some of the heat out of the Chinese market.
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Equally significant is the wave of scrap washing up on China’s shores as imports rebound after policy-makers reversed a planned ban on what had been designated “waste”.
Now classified as a “resource”, scrap is flooding into the country, reducing the requirement for refined metal.
It could be a “hugely negative factor for world copper prices”, analysts at Roskill said.
Alternatively, the displaced metal could find a new home in the United States, where the evidence of a tightening copper market is mounting.
Scrap is the ultimate balancing mechanism for the copper market. Availability diminishes during periods of low pricing and surges when the price rallies.
Given London Metal Exchange (LME) copper’s spectacular recovery from its covid-19 low of $4,371 per tonne to over $10,000 in May, a resurgence in scrap supply was to be expected.
The impact has been accentuated in China by the country’s flip-flop on the status of copper scrap.
Shipments declined sharply over 2019 and 2020 ahead of a proposed ban on all “solid waste” at the end of last year. That was partly reversed in November to exclude higher-grade recyclable material.
Imports of scrap have accelerated since. The first-half tally of 821,000 tonnes was up 91% on the year-earlier period.
Flows from the United States in particular have kicked back in after two years of steady decline. China imported 104,000 tonnes of U.S. recyclable copper in the first half of this year, up from just 31,000 tonnes in January-June 2020.
These are bulk tonnage figures but the new purity thresholds mean the material has a relatively high copper content of just under 80% on an average valuation basis.
Roskill, part of the Wood Mackenzie research group, calculates that China imported an extra 350,000 tonnes of copper in scrap form in the first half of the year.
That displaced both other raw materials and refined metal as fabricators fed more lower-priced scrap into their product mix.
If copper scrap keeps arriving at Chinese ports at this pace over the rest of the year, the hit to refined metal demand could be as big as 400,000 tonnes, Roskill calculates.
The notable slowdown in imports of refined copper over the last three months suggests the displacement effect is already working its way through the Chinese market.
The deceleration of copper’s Chinese driver is happening just as the US market shows signs of needing more metal.
The CME copper contract has witnessed a severe squeeze on the Sep-Dec 2020 spread over the last couple of weeks, which looks to have been accompanied by a sharp reduction in short positions held by money managers.
Funds have slashed their bear bets from 44,978 contracts in June to just 22,210 contracts, according to the latest Commitments of Traders Report. That has lifted the collective net long to 46,137 contracts.
The action on a backwardated COMEX contract has opened up a sizeable arbitrage with the London market, which high and rising stocks have maintained in comfortable contango.
Most of that inventory, however, is located in Europe and Asia. LME warehouses in the United States hold just 1,175 tonnes of copper – all of it at New Orleans and 875 tonnes of it awaiting physical load-out.
CME stocks at 45,885 tons are down by 31,700 on the start of January and most of the stock is stranded in Salt Lake City and Tucson, meaning high freight costs for east-coast consumers.
Imbalanced inventory and divergent curve structures point to a physical shortage of metal underlying the positional jostling across the CME spreads.
“The realities of the current logistical bottlenecks have meant that US copper imports have so far not been enough to meet demand, and it does not look like it will get materially better until after September,” according to analysts at Citi. (“Metals Weekly”, Aug. 2, 2020)
US copper demand has been in full recovery mode as lockdowns ease, led by a booming home improvement sector.
Citi estimates that apparent US copper consumption jumped by 22% year-on-year in January-May and the country needs to lift imports by 80,000-90,000 tonnes per month over July levels for the arbitrage with London to normalise.
The big question is whether Chile, which already accounts for most of US imports, can divert more metal to plug the gap or whether it will take the physical movement of European stocks that will come with a higher shipping cost.
The unfolding dynamic in the US copper market mirrors what is happening in other metal supply chains with premiums for aluminum, tin and lead all hitting record highs in recent weeks.
The common themes are rebounding demand and lower imports due primarily to rolling disruption in the shipping sector.
In the case of copper, US consumers may turn out lucky because the increased pull on units from the rest of the world is taking place just as China’s import appetite is waning.
The copper baton looks set to pass from east to west.
(Editing by Barbara Lewis)