Perfect storm in scrap is copper’s hidden bull driver

The London Metal Exchange (LME) copper price collapsed to a four-year low of $4,371 a tonne in March as China’s huge manufacturing sector went into partial lockdown.

Even though the covid-19 chill on metals demand has subsequently spread around the world, copper has come bouncing back. At $6,500, it is now up 5% from the start of January.

Doctor Copper’s remarkable recovery has been fuelled by massive Chinese buying, low stocks and supply stresses in key producer countries, such as Chile and Peru, that are still battling the coronavirus.

The hidden ingredient in this bullish mix, however, is massive disruption to the sub-surface scrap segment of the copper market.

A “perfect storm” in recyclable copper has cost the market 500,000 tonnes of contained copper supply so far this year, said analysts at Roskill (“Copper: Prices realise ‘supercharged recovery’ through H1 2020”, July 10, 2020).

Even that figure might be a serious underestimate, the International Copper Study Group (ICSG) says.

That’s the problem with scrap. It’s notoriously opaque and therefore hard to count. But it is one of copper’s hidden motors and this year’s scrap collapse is a major component of the market’s resurgence.

Scrap chain

Copper scrap accounts for about 35% of the global copper market, according to Roskill.

The global scrap chain was already in disarray before covid-19. Copper was dragged into China’s war on foreign garbage, resulting in ever-tighter import restrictions and a structural decline in purchases by the world’s largest scrap buyer.

Chinese scrap imports fell by 32% in 2018, when the new import rules were first introduced, and slumped a further 38% last year.

Big scrap generators, such as the United States and the European Union, are now sending material to Malaysia and other Asian countries for processing and upgrading before onward shipment to China.

However, global scrap trade flows have dropped significantly over the past two years as China has closed the import door.

U.S. exports in 2019 were the lowest since 2006. The material may be in long-term storage or the copper may have returned to the ground in the form of landfill. Either way, it hasn’t been flowing in the same quantities to the countries that process it and return it to the supply stream.

An already fragile scrap supply chain has been devastated by the coronavirus this year.

Lower scrap generation owing to price weakness and reduced manufacturing activity has been compounded by locked-down collection and recycling networks and disruption to international shipping logistics.

The net result has been a further 25-30% slide in international flows of copper scrap and alloy in the first half of this year, “equivalent to at least a 500,000-tonne copper content supply shortage”, Roskill says.

Hidden supply driver

The ICSG calculates that much went missing in the first three months of the year alone, with a similar-sized hit likely to have occurred in the second quarter as lockdowns led to lower scrap “harvests” and processor countries such as India shut up shop completely.

The problem with quantifying the scrap shortfall is down to the way it literally melts into the copper value-add chain.

The ICSG estimates that 3.3 million tonnes of copper scrap were refined into new metal last year, much of it in China, which has historically sucked up the rest of the world’s old scrap as a relatively cheap source of copper.

However, much more – some 5.2 million tonnes of scrap – was melted by global fabricators into their intermediary products.

This is a particularly murky part of the market, not least because each operator will be using its own blend as well as reacting to price.

Statistically, the copper market can be seen two ways. If you calculate a supply-demand balance in primary metal, the size of the market last year was a little more than 24 million tonnes.

If, however, you count the production and consumption of intermediate copper and alloy products such as wire rod, the market last year totalled almost 30 million tonnes.

Direct-melt scrap is the difference between those two figures. Existing just beyond the collective market focus on primary metal balances, it is one of the least statistically explored corners of the copper market.

The ICSG’s calculation of a 532,000-tonne shortfall in copper scrap availability in the first quarter of 2020 should be referenced against the products rather than the primary market.

Inevitably, however, there is a flow-through from scrap shortage to increased appetite for primary metal.

Part of China’s extraordinary surge in refined copper imports this year is down to this scrap gap, with scrap refineries generating less new metal and fabricators having to increase the amount of copper they buy in refined form to make their products.

Slow recovery

The scrap collapse could last for some time yet.

What should happen is that copper’s price resurgence leads to a surge in scrap supply and China rejigs its policy to allow higher-grade scrap to enter the country as a strategic resource.

However, China’s customs department missed the July target for launching the new system, so imports that are already down another 48% this year will remain subject to quotas and restrictions until the end of the year.

Meanwhile, the assumption that higher prices will revitalise scrap flows assumes that scrap dealers have been accumulating material in their yards.

But this particular scrap crisis has been as much about the seizing-up of supply as price.

A June webinar hosted by international recycling association BIR heard assessments that scrap flows at North American yards had fallen by up to 70% at the height of lockdown.

It’s a similar story everywhere else, with scrap processors in Hong Kong and Taiwan now reopened but with volumes 30-40% lower than normal.

Throw in the stop-start nature of recovery in the manufacturing sector outside of China and new scrap generation could remain slow over the northern hemisphere summer.

Old scrap supplies will recover only after lockdowns are lifted completely and even then international trade seems likely to remain depressed relative to historical norms until China sorts out its import policy.

It may not garner as many headlines as Chilean producers struggling to maintain production in the face of spreading infection rates, but scrap, or the lack of it, is going to be a core feature of the copper market until further notice.

(Editing by David Goodman)