(Repeats story filed on Aug. 2 without changes. The opinions
expressed here are those of the author, a columnist for
Reuters.)
By Andy Home
LONDON, Aug 2 (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. (https://tmsnrt.rs/3C81YWg)
High prices and Beijing's attempts to fade last year's
stimulus have taken some of the heat out of the Chinese market.
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. ("China’s scrap rebalancing
act threatens to de-rail the price recovery,", July 28, 2021.)
Alternatively, the displaced metal could find a new home in
the United States, where the evidence of a tightening copper
market is mounting.
SCRAP WAVE
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.
(https://tmsnrt.rs/3fm7Hy3)
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.
U.S. MARKET TIGHTENS
The deceleration of copper's Chinese driver is happening
just as the U.S. 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. (https://tmsnrt.rs/3jfZgW6)
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 U.S. 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)
U.S. copper demand has been in full recovery mode as
lockdowns ease, led by a booming home improvement sector.
Citi estimates that apparent U.S. 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 U.S. 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.
SHIFTING DRIVERS
The unfolding dynamic in the U.S. copper market mirrors what
is happening in other metal supply chains with premiums for
aluminium, 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, U.S. 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)