A global trading market in transition

Rapid growth and investment in the Chinese economy during the past two decades have coincided with insatiable demand for copper in China. This was occurring at the same time copper consumption in many other parts of the world was stagnating and existing secondary copper smelters were shutting down because of local environmental pushback or economic viability reasons.

For the last 20 years, scrap trade flows have occurred mainly from net producers of metallic scrap to net consumers of scrap with minimal processing occurring in the generating markets. Rapidly rising demand for copper in China, coupled with limited restrictions or safeguards on scrap quality or specifications, encouraged Chinese importers to acquire whatever grades of postconsumer and postindustrial scrap they could. As a result, China became the prime example of a net scrap consuming market.

With wide disparities between processing costs in China and more developed markets such as North America, Western Europe, Japan and South Korea, the scrap yards and traders in those developed markets were happy to procure and sell scrap to China at more favorable pricing and shipment terms than they could arrange with domestic buyers.

This arrangement benefited scrap exporters in net-producing markets and scrap importers in net-consuming markets. This was especially true when refined copper prices were skyrocketing because of the limited availability of copper concentrates and the lack of regional smelting capacity to support China’s rapid growth. As a result, an entire global trading industry was formed to transport various grades of nonferrous scrap metals from net-producing markets to net-consuming markets like China.

However, these traditional scrap flows have been upended with China’s recent actions to limit or ban certain imports of metallic scrap. These developments have opened doors for the potential rise of intermediary processing markets in the scrap trade, where neither large volumes of metallic scrap are produced or consumed. Rather, scrap is imported to be processed, sorted and in some cases even smelted or refined into marketable copper and aluminum products prior to re-export to consuming markets.

Evolving policies

Scrap-related policies have evolved rapidly in China the past five years. China has long been the largest consumer of traded copper and aluminum scrap. The region lacked sufficient primary copper and efficient transport networks to bring adequate volumes of concentrate or refined cathode into China, especially from 2002 to 2011 as major investments in infrastructure and durable goods manufacturing capacity during the past 20 years, a lag in global copper concentrates and refined cathode availability and a lack of domestic Chinese smelting capacity necessitated scrap imports to balance the country’s primary copper deficit. During that period, China consumed significant amounts of foreign scrap, with scrap utilization rates reaching a peak of 26 percent in 2006.

Because of the rapid addition of primary smelting and refining capacity in recent years, scrap utilization rates have fallen as the logistical and operational challenges associated with bringing copper concentrate into China have been overcome. As a result, China’s share of global copper and aluminum scrap imports gradually declined from 2012 to 2017. The country’s aluminum scrap imports fell from 34 percent in 2012 to 22 percent in 2017, and its copper scrap imports fell from 60 percent in 2012 to 52 percent in 2017.

While China remained the largest import market for these products, import volumes for aluminum and copper scrap already had begun to decline during the five years prior to the Category 7 restrictions because of three key factors. First, the requirements for secondary feedstocks like scrap began to fall as China’s smelting and refining capabilities grew. Second, escalating wages gradually made the Chinese market an increasingly unattractive export market. For example, zorba exporters serving the Chinese market often would sell at a certain discount to the London Metal Exchange (LME) aluminum price and earn their margin from the narrow spread between zorba export prices and LME aluminum prices. However, these discounts became wider as wages and commercial processing costs increased in China. While the United States experienced moderate growth in wages over the past 10 years, Chinese labor costs more than tripled, reducing the margin that scrap traders could receive from shipments priced on a discount to the LME.

Finally, the Chinese government has announced many internal initiatives designed to boost domestic scrap collection and processing infrastructure. Yet, growth in domestic availability of segregated, marketable scrap grades likely will be limited over the short term because the industry remains fragmented and underdeveloped.

Enforcing restrictions

In July 2017, the Chinese government announced significant restrictions on the import of certain postconsumer materials known as Category 7 scrap, which came into force from January 2019 onward.

The February 2013 enactment of Green Fence scrap import inspections and numerous ad hoc customs efforts since 2015 have aimed to root out smuggling and circumvention of new regulations by exporters and importers alike. These efforts culminated in 2017 with the announcement of a formal ban on Category 7 scrap.

With the ban on Category 7 scrap and restrictions on contaminant levels for Category 6 scrap grades, overall export volume destined to China has fallen sharply the past two years. Some of this material has been diverted to markets in Southeast Asia. In particular, scrap is going to areas where new secondary smelters are ramping up or China-based scrap companies are installing processing equipment to upgrade the copper content of low-quality mixed grades for re-import into China as Category 6 scrap or as material with more than 96 percent copper content.

In July 2019, China placed additional import volume restrictions on Category 6 material and limited import quotas to verified refineries or brass mills, thereby effectively removing traders or intermediary processors from the import market. In October 2019, a new standard for classifying copper scrap was announced, which establishes standardized assaying procedures and prohibits the import of copper scrap with less than 96 percent copper content. Expectations in the Chinese market are that import quota volumes for copper scrap will be slashed in 2020 and that no further quotas under the existing system would be issued from 2021 onward.

These developments are clear in the recent trade figures for the U.S., which show that exports of copper scrap to China have shrunk from around 70 percent of the total at the end of 2017 to less than 10 percent in the second half of 2019.

This new scrap surplus can be consumed domestically in places where excess domestic secondary smelting capacity exists (i.e., smelters in Western Europe). It also can be processed into a higher grade like No. 1 wire chops for direct-melt use in regions with no significant secondary smelting capacity (i.e., brass mills in the U.S.) or processed for re-export in forms pure enough to meet the new standards in China or elsewhere (i.e., emerging scrap processing clusters in Malaysia).

Market outlook

Stakeholders across the supply chain have responded in a variety of ways in the 16 months following this structural schism in the market.

Consuming markets for copper and aluminum scrap largely will benefit from Chinese scrap policies as the availability of copper and aluminum scrap in the global marketplace has increased since mid-2018. These markets, including Thailand and India, look to eventually take on some of the demand that used to flow directly into China as the economies in both these markets grow. While neither has yet shown significant increases in scrap consumption, CRU expects to see structural growth in scrap demand in both nations. In particular, refined copper demand in India is expected to rise an annualized 9.1 percent over the next five years, and a significant portion of that demand will flow into scrap-intensive brass mill products used in construction.

Net producers of scrap, including the U.S., Western Europe, Japan and Canada, are contending with the challenge of finding new homes for their scrap. Certain domestic scrap operators in these markets already have followed through on plans to install equipment that can process the scrap into streams pure enough to be exported or consumed domestically by brass mills. This includes wire granulating systems to process insulated wire and eddy current separators and optical-based or density-based sorting equipment to upgrade lower quality zorba and breakage into marketable twitch and copper-bearing streams for further processing.

However, installations of new equipment for processing have not been universal and are seen as half measures within the context of an industry that has become accustomed to viewing China as a “relief valve” for material streams that were commercially or environmentally unviable to process domestically.

Many see long-term stability in a processing trade market developing in Southeast Asia, particularly in Malaysia, Indonesia and Vietnam, though significant uncertainties remain about the volume of scrap that could reasonably be diverted through Southeast Asia beyond the current five-year time frame.

As the import ban was announced and the countdown began, numerous announcements were made by Chinese scrap processors on and off the record about moving their processing capabilities off-shore to use lower cost labor in other regional jurisdictions to process the copper and aluminum scrap, upgrade the sorted material and then re-export the higher grade copper back to China. While some of these major investment plans have been shelved, nonetheless there has been an explosion in wire and cable granulation capacity additions outside of China during the past two years directly in response to these trade flow disruptions. 

Despite these opportunities, limits to the speed of capacity development and logistical difficulties will raise the overall costs of using scrap as an input material in China when processing through these markets. Beyond the investments in processing equipment and qualified personnel in these nations needed to support the processing trade, the speed of development is limited by the lack of significant domestic scrap processing systems and controls, effective port infrastructure and the required knowhow in these nations.

Ibrahim Yucel is a senior consultant with London-based CRU Group. Visit www.crugroup.com for more information.