Copper faces double supply disruption threat in 2018

One down, plenty more to go. The Lomas Bayas copper mine in Chile, operated by Glencore, has just averted a threatened strike. Unionised workers accepted the terms of a new labour contract at the eleventh hour. The number of labour contracts up for renewal this year, most of them in Chile and Peru, is the highest since 2010.
The threat to mine supply from strike action looms large, not least at the world's biggest copper mine, Escondida, where a 44-day walkout last year ended with no meeting of management and union minds. Analysts have collectively tweaked their supply disruption allowances to factor in the potential for labour unrest this year.
However, copper faces a double disruption threat in 2018. The second comes from the shadows of the copper scrap sector, an important but statistically opaque part of the supply chain. China's clampdown on imports of low-grade scrap, "foreign garbage", has already sent tremors through the plastic and paper sectors.
Now, it looks as if it's copper's turn. A new raft of measures, if fully enacted, risks stemming the flow of scrap to the world's largest volume importer. To quote Michael Lion, president of Lion Consulting Asia and a seasoned veteran of the scrap trade, "at the very best, there is going to be an enormous dislocation and disruption in the copper supply chain." An announced tweak to China's copper scrap import regulations jolted the market into life last July. The threat at that time was that imports of "Category 7" scrap would be banned at the end of 2018.
Which seems to remain the case. "Category 7" scrap, comprising products such as cables and motors which need to be physically dismantled and sorted before being processed, remains on the 2018 list under the "restricted" column. Chinese operators have lost no time in offshoring the processing of this type of material to other Asian countries in preparation for a full halt in imports.
This is low-grade stuff, typically containing about 14-15 percent copper, and accounts for only a relatively small part of China's total copper import needs. Much more significant are two other policy changes, both of which should be seen in the context of Beijing's "clear skies" policy of slashing pollution levels.
The first is the systematic elimination of the middle man in China's copper scrap supply chain. The Ministry of Environmental Production announced on Dec. 15 that only end-users and processors of copper scrap would be allowed import quotas this year. Traders and merchants, apparently, need not apply. The second is a proposal from March to limit hazardous impurity levels to 1 percent, a quality threshold only the purest copper scrap can be expected to pass.
The cumulative impact of these two rule changes has been a near collapse in applications for new 2018 copper scrap import licences. China imports more than 3 million tonnes of copper scrap, bulk weight, every year. Inbound flows fell steadily over 2013-2016, partly because of earlier quality control measures by the Chinese authorities and partly because the copper price was bombed out.
At low prices the supply of old scrap dries up, acting as a counterbalance to excess supply in the primary part of the market. When the price recovers, the scrap chain bursts back into life again. This is what has happened in the copper market over the last year or so. A sharp recovery in price over the course of 2016-2017 has seen scrap supply surge with price discounts widening and China soaking up the extra units.
Last year's cumulative imports through November were up 9 percent, the first year-on-year rise since 2012. Next year, however, could be a very different story, unless the authorities relent on the new import restrictions. If they don't, a significant supply hit for copper in the form of scrap will translate into greater appetite for copper in other forms, either refined metal or concentrates. Imports of refined copper were down 11 percent in the first 11 months of 2017 but November's count of 329,000 tonnes was the highest since December 2016 and an upside surprise.