Policy Uncertainty and High Arbitrage Inventories: The Dilemma of the Secondary Copper Market

This week, the copper market showed a pattern where the overseas market outperformed the domestic market, with the most-traded SHFE copper contract fluctuating upward by 1,500 yuan/mt, while the price of bare bright copper in Guangdong followed the rise by 700 yuan/mt to a range of 78,500–78,700 yuan/mt. Regional divergence was significant: trading activity in east China and north China recovered somewhat as prices rose, while south-west China remained stable. This regional disparity continues to highlight structural imbalances in local supply-demand fundamentals.

The market exhibited a weak supply-demand pattern. On the supply side, suppliers generally held back sales in anticipation of further price increases, leading to limited growth in actual circulating supply. On the demand side, secondary copper rod enterprises remained cautious. Although the price difference between copper cathode rod and secondary copper rod stayed above 3,000 yuan/mt, orders from end-use sectors such as home appliances and construction showed no significant improvement. More importantly, local incentive policies related to Notice No. 770 remain unclear in key production areas like Jiangxi and Anhui. Enterprises primarily focused on fulfilling existing orders, with weak willingness for new purchases.

Industry data showed that the operating rate for secondary copper rod fell to 21.74% this week, down 5.83 percentage points WoW. The price difference between copper cathode rod and secondary copper rod widened to 1,581 yuan/mt, and the discounts for secondary copper rod against futures in Jiangxi expanded to 1,123 yuan/mt. Notably, against the backdrop of rising raw material costs, the gross profit from secondary copper rod sales decreased by 186 yuan/mt WoW to 1,088 yuan/mt. Enterprises in Hubei, Jiangxi, and other regions chose to suspend production again due to policy uncertainty and poor orders, creating an unusual situation of "rising prices but falling operating rates."

Structural changes emerged in the market: persistently high price differences between primary and secondary copper spurred arbitrage activities. Traders bought secondary copper rod while simultaneously hedging with futures to lock in profits, leading to large amounts of spot cargo being held in warehouses as financing collateral. This accumulation of "hidden" inventory creates potential supply pressure, reflecting the underlying weakness in physical demand.

Looking ahead, with the end of the US government shutdown bringing stability to the macro front, copper prices may continue to fluctuate upward. However, demand for recycled copper raw materials is constrained by low operating rates and is unlikely to improve significantly, limiting price gains. The market should closely monitor the implementation progress of local incentive policies, changes in end-use demand during the traditional off-season, and the impact of price spreads on arbitrage activities. If futures prices remain strong, copper scrap prices may find support, but weak fundamentals could trigger a pullback. It is advisable for industry participants to closely watch policy developments and inventory changes and proceed with caution.