Weaker-than-expected substitution of copper cathode with copper scrap despite wide price spread

SHANGHAI, Jan 25 (SMM)—As of January 21, 2021, the price spread between copper cathode and copper scrap stood at a four-year high 3,202 yuan/mt, a gain of 249 yuan/mt from the previous day. However, premiums in the domestic spot market remained high amid continued declines in domestic copper cathode inventories, as the substitution of copper cathode with copper scrap weakened.

Market focus on copper scrap has increased in recent years amid strict environmental requirements. Which peaked in July 2020 due to the enact of the new solid waste law and the implementation of secondary copper resource standard in November. The price advantage of copper scrap is noticeable when the price spread between copper cathode and copper scrap exceeds 1,200 yuan/mt.

With enhanced environmental protection requirements in Henan and intensified COVID-19 situations in Hebei, consumption of copper scrap in the north has been severely reduced. Copper rod plants using copper scrap as feedstock refrained from restocking copper scrap against low copper rod prices and ample raw material inventory. This combined with plans to shut ahead of CNY has kept available copper scrap ample, prompting downstream buyers to push for lower procurement prices. As such, the price spread between copper cathode and copper scrap widened to 3,300 yuan/mt, and the price spread between copper rod produced with copper cathode and with copper scrap exceeded 2,200 yuan/mt. Strong price advantage ensured brisk trades of copper scrap, despite high SHFE copper prices.

Copper cathode output in January should fall nearly 9% on the month due to maintenance at several big smelters and the absence of a production rush at most smelters at the beginning of the year. Meanwhile, the influx of imported copper should be limited amid a closed import window. Social inventory of copper cathode in China's mainstream markets should continue to fall. Inventory declines in the week ended January 15 stood at 10,800 mt, with the decline in Shanghai and Guangdong most significant. Spot premiums in Shanghai and Guangdong also reflected the strong spot copper market. Spot premiums in Shanghai surged to 180 yuan/mt at one point even as SHFE copper prices fluctuated between 58,500-59,500 yuan/mt. In addition to transactions among trader under long-term contracts, downstream buyers stocked up on cargoes.

The high price spread between copper cathode and copper scrap did not boost the substitution of copper cathode with copper scrap to result in weaker copper consumption and significant stock accumulation.

SMM understood that weaker substitution of copper cathode with copper scrap amid weaker consumption since December, coupled with disruptions to copper supply, accounted for copper inventory declines, even as operating rates fell across copper semis producers. In addition, the influx of non-standard and non-registered copper into the domestic market since 2020 has also substituted copper cathode, weakening demand for copper scrap.

Annual domestic capacity of copper rods produced with copper cathode stands at around 16 million mt, and annual capacity of copper rods produced with copper scrap stands at 5 million mt. Copper rod produced with copper scrap drove the recent decline in consumption across copper rods processing enterprises. Orders of electric wire and cable decreased in January, weakening the substitution demand of copper cathode with copper scrap significantly. Photovoltaics and motors sectors with brisk domestic and export orders in 2021 mainly use enamelled wire, and the substitution effect of copper scrap is relatively weak due to process issues. Copper tubes, strips and foils mainly use copper cathode, also limiting copper scrap consumption. 

The approach of CNY combined with COVID-19 should weaken copper scrap. But trades of copper scrap are likely to improve if the price spread stabilises above 3,000 yuan/mt. The price spread between copper cathode and copper scrap should stabilise at the current high level in the near term.

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