Why was the price spread between copper scrap and copper cathode still high even as domestic copper scrap was in short supply?

SHANGHAI, Feb 26 (SMM)—Copper prices surged to record new highs after the Chinese New Year (CNY) holiday, while the the price spread between copper cathode and copper scrap fluctuated vigorously. The tax-included price spread between 1# bare bright copper and copper cathode rose to the second highest on record of 3,779 yuan/mt on February 25. It touched an all-time high of 3,936 yuan/mt on February 22. 

SMM learned that traders and producers that use copper scrap as raw materials restocked copper scrap that could guarantee production for only a few of days as they concerned about the COVID-19 pandemic and high copper prices. Copper scrap users intended to purchase raw materials as they restarted production after the holiday, but small copper recyclers resumed later and strong copper prices prompted them to hold prices firm. Tight copper scrap supply supported its prices. 

But why was the price spread between copper scrap and copper cathode still at historic highs?

The copper scrap market is not a fully traded market. Quotations are varied and cannot reflect fundamentals correctly. Copper content of copper scrap is lower than that of copper cathode. If copper prices increase by 1,000 yuan/mt, copper scrap prices will increase by at most about 800 yuan/mt. Therefore, copper scrap prices will not completely follow the fluctuations of copper prices.  

In addition, copper scrap supply tightened recently, but high copper prices drove copper scrap users to restock only as required. 

Copper scrap prices determine the main cost of scrap users and will also determine their products prices. On the contrary, if scrap users reduce prices to increase sales, it will also restrain traded prices of scrap copper.

When the price spread between copper cathode and copper scrap is large, prices of copper rod made of copper scrap will be lower. It can also be understood that when the price of scrap copper rod is low, the price of copper scrap will be restricted. China’s copper scrap imports fell sharply last year and domestic copper scrap supply was tight, but the price spread rose to above 2,000 yuan/mt. This is related to the price of copper rod made of copper scrap. 

SMM expects that domestic tight copper scrap supply will not ease significantly until mid-March.  At present, domestic copper scrap holders were reluctant to sell as they were bullish on future prices. Unless the copper price does not continue to rise, this part of copper scrap will flow into the market in large quantities. Many factories cleared copper scrap inventories before the holiday, and new copper scrap will be produced after a period of time.

Large amounts of copper scrap are expected to enter the domestic market next week as the short-distance transport from Hong Kong to mainland China has just recovered. 

Importers are likely to raise imports significantly after the domestic and foreign price gaps are narrowed.