Even now, with the industry largely recovered, new Chinese import regulations have come into effect, potentially shaping global scrap flows over a longer time horizon. Here, we present six of the key themes to watch in the copper scrap market during 2021.
Chinese import regulations
China officially implemented its new non-ferrous scrap import regulations on 1 November 2020, essentially permitting the unrestricted import of certain high-quality copper and copper alloy scrap types by reclassifying them as recyclable raw materials. The previous quota system for Category 6 scrap will remain in effect until the end of the year but will become redundant in 2021. The implementation of these new rules is likely to mean greater Chinese import demand for specific high-quality scrap types, which may result in more competition and a tighter market in the rest of world and potentially narrower discounts.
China’s domestic generation
Despite the Chinese domestic copper scrap industry being highly fragmented, with many small players (a large copper scrap recycler would process ~20,000 t per year), the industry is set for strong growth over the coming years. One key processing hub in Yingtan City, Jiangxi province, is aiming to expand scrap copper processing activities to over 400,000 t/y by 2021. Due to an ever-growing scrap pool and to encourage greater self-sufficiency and security, the Chinese government have made developing this sector a stated aim. During the second half of this year, there has been a rise in domestic scrap generation, and this could be an important trend to watch in 2021. Although any rapid increase in domestic generation is unlikely, how the industry performs next year, as we enter the country’s 14th Five-Year Plan, will be a good indicator of its longer-term potential.
As mentioned above, new import regulations are likely to cause increased volumes of high-quality scrap to flow to China, as buyers source this material from abroad. However, it will take time for exporters to China to become familiarised with the new system and for shipping companies to become confident transporting scrap cargoes to China (as they are now liable for the cost of disposing of scrap that does not meet import requirements). Although we expect a year on year increase in volumes during the first half of 2021, it is unlikely that there will be a sharp rise in scrap shipments to China and most market participants do not expect significant volumes until the second half of the year. This new export demand is likely to cause discounts for No.1 and No.2 scrap types in Europe and the US to narrow.
In addition, the flow of low-quality scrap to South East Asia, India and Pakistan for processing is set to continue, with the final product ultimately exported to China in a form adhering to the new regulations.
The spectacular copper price rally in recent months has primarily been driven by high levels of monetary and fiscal stimulus, a strong recovery in demand in China, clarity over the US political situation, and more recently vaccine advances and a weakening of the USD. This rally has promoted very good levels of scrap availability, with traders and dealers cashing in and making healthy profits. We currently forecast that the copper price will remain well supported next year, in a balanced market, which should help maintain good levels of scrap supply. However, if there is a sharp price correction the scrap market could quickly tighten as traders and dealers hold on to material rather than selling at a loss. These market participants rarely hedge and so are effectively always long on copper. Recycling rates could also take a hit if the value of scrap drops, reducing generation.
Granules (processed wire & cable scrap) have become an important feature of the market in Europe and the US over the past couple of years as Chinese bans on Category 7 (20% - 70% Cu) scrap imports have resulted in more wire & cable scrap remaining in domestic markets. As a result, there has been a rapid increase in wire and cable granulation capacity in South East Asia, Europe and the USA. Recently, Aurubis, the world’s largest copper scrap consumer, announced a joint venture with TSR Recycling, called Cablo GmBH, to processes wire & cable scraps in Germany, which should be completed in Q1 2021. Granules are reportedly easier to import to China under the new regulations and we have already heard reports of Chinese buying interest in Europe because of this. As a result, we could see availability tighten more quickly for granules than for other scrap types in the rest of world.
The E-scrap industry was heavily affected by Covid-19 lockdowns as recycling rates plummeted and many processing facilities were forced to shut or operate with a reduced workforce in Q2, especially in Europe. However, with lockdowns being eased in Q3 and with people clearing their homes and upgrading home office equipment, significant quantities of electronic waste were generated. Yet bottlenecks at processing plants have limited E-scrap feed available for smelters. As a result, the market has been tight with secondary smelters in Europe and Japan bidding for material at aggressive terms. The consensus among Industry participants is that the market should be more balanced in 2021.Explore this topic with CRU