May 16, 2018 / 1:03 AM / 6 months ago

RPT-COLUMN-Copper scrap a key battleground in China's war on waste: Andy Home

(Repeats without change. The opinions expressed here are those of the author, a columnist for Reuters)

* China's copper scrap imports: tmsnrt.rs/2IgpZlD

* Top 20 suppliers year-on-year change: tmsnrt.rs/2Ihlc3v

* Top 20 suppliers by weight: tmsnrt.rs/2IgrFvr

By Andy Home

LONDON, May 15 (Reuters) - China’s self-declared war on “foreign garbage” has come to America.

From May 3 all U.S. shipments to China of secondary materials, from scrap metal to plastics and waste paper, are suspended for a month.

China Certification and Inspection Group (CCIC) North America, the sole body licensed with checking U.S. cargoes before they sail, will not be allowed to issue export certification documents until June 4.

During the one-month suspension every container with U.S. waste material at Chinese ports will be opened, inspected and, if necessary, undergo laboratory testing.

The reason, according to China’s General Administration of Customs (GAC), is that “multiple shipments” of U.S. scrap have failed to meet tough new environmental regulations since the start of the year.

The rest of the world is only now waking up to how serious China is about keeping “foreign garbage out of our country’s gate”, as GAC expressed it in its notification.

TIGHTENING THE SCREWS

That, of course, is likely to have implications for the copper market, with China the destination for almost half the world’s copper scrap exports, according to the International Copper Study Group.

Last year China imported 3.56 million tonnes in gross weight.

A ban on imports of lower-grade Category 7 scrap, such as motors and insulated wire that has to be dismantled and cleaned before being used as a metallic input, was announced in July last year and will be effective from the end of this year.

Analysts are broadly in agreement that this will affect something like 300,000 tonnes of contained metal, with the net effect offset by imports of higher-grade material and more domestic recycling.

However, new rules that took effect at the start of March go way beyond simply weeding out lower-grade scrap.

The key is the concept of “carried waste”, which means any contaminants in a shipment of scrap material. The Chinese authorities have set thresholds at 0.5 percent of total weight for paper, wood and plastic and 1 percent for non-ferrous metals.

This upends the way the recycling industry has evolved in the rest of the world.

As the Institute of Scrap Recycling Industries (ISRI) — a U.S. trade group — said in its formal response to the Chinese proposals, there are more than 150 specifications for non-ferrous scrap, with impurity thresholds ranging from zero to 4 percent.

“There is no other country in the world that uses its own set of standards as a ‘pass/fail’ test for imports,” ISRI said in a Nov. 15 submission to the World Trade Organization.

But that is precisely what China is now doing, hence the month-long, container-by-container inspection at the country’s ports.

Nor is this a case of copper scrap suffering collateral damage from plastics or waste paper.

A specific concern for GAC is scrap metal containing what it terms “powdery substances”.

The allowable threshold for powder contaminants has been set at a draconian 0.1 percent of total weight, even though ISRI has pointed out that certain types of copper oxidise into cupric oxide powders that are still copper and satisfy ISRI specifications.

Graphic on China's copper scrap imports, in gross weight and with implied content: tmsnrt.rs/2IgpZlD

Graphic on top 20 suppliers in Q1 and change vs Q1 2017:

tmsnrt.rs/2Ihlc3v

Graphic on top 20 suppliers in Q1 by gross weight:

tmsnrt.rs/2IgrFvr

DOMINANT SUPPLIER

The crackdown on U.S. shipments of waste effectively targets the country that has become China’s dominant supplier of copper scrap as imports from other, lower-quality suppliers wind down.

In gross weight terms, China’s imports slumped by almost 40 percent to 553,000 tonnes in the first quarter.

However, the implied purity of those imports — calculated by cross-referencing the customs department’s dollar value of imports against the copper price — jumped from 43 percent to almost 60 percent.

The implied hit on copper units, therefore, has been much smaller than implied by the headline figure; something like a 5 percent drop.

Countries that have historically supplied low-purity scrap, such as the Philippines, Malaysia and Thailand, have registered steep drops in exports to China in the first three months of the year. Only six of the top 20 suppliers achieved any volume growth, with only two of those having been significant suppliers of scrap to China, namely Britain and the United States.

Imports from the United States grew by 5.8 percent in the quarter to 129,300 tonnes in gross weight.

In tonnage terms this was only a modest 8,000 tonne increase, but the import share taken by the United States jumped to 23 percent from 15 percent in the same quarter last year.

China’s next largest supplier, Hong Kong, suffered a 63 percent collapse to only 58,800 tonnes. In other words, China has slammed the door shut on its most important supplier of copper in scrap form.

MORE DISRUPTION AHEAD

OK, so it’s only for a month. But there are two problems with the time line.

First, can GAC meet its target of “100 percent open-box inspection and quarantine” in only a month?

Secondly, how long until the next container-level check? Because this is the way Chinese enforcement tends to work, as evidenced by the rolling campaign of environmental inspections that have caused turmoil across industrial sectors over the past year or so.

Which both serve to inject further uncertainty into what happens to scrap flows this year.

If the elimination of Category 7 scrap is the “known known”, the combination of the new “carried waste” thresholds and the enforcement of those standards is a significant “known unknown”.

So too is any follow-on impact on China’s domestic market copper balance.

Scrap feeds into the supply chain in two ways, as a raw material for refining and as a direct melt input by fabricators.

It is the dark matter of the copper universe. Statistically obscure, its presence is largely felt by proxy, either through its displacement effect on other raw materials, such as concentrates, or for refined metal.

This year was already shaping up for tectonic shifts in how this dark matter flows between generators of scrap and the world’s largest buyer. But things could turn out to be more tumultuous still as China’s war on waste goes global. (Editing by David Goodman)

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