Trade War Is A Cordial For Chinese Metals

Chinese copper producers and traders are using an unexpected surge in business to push spot prices to the highest level in nearly two years. Manufacturers are scrambling to buy refined metals to avoid the effects of the scrap copper tariff, which came into effect on Thursday. GOC announced two weeks ago that it would import $16bn worth of goods, including scrap metal, from the United States, and will impose a 25% tariff on them from August 23 in retaliation for similar moves by the US government.

The United States is one of the largest suppliers of scrap copper in China. This week, China SMM reported a jump in its premium for Yangshan copper to $9/t, it is the highest since November 2016 and a 13% increase in the past two weeks alone. Five weeks ago, the premium hovered around the lowest for the past 10months.The premium for physical delivery is paid by Chinese copper importers, while the London Metal Exchange futures CMCU3 index has fallen about 18% since hitting a four-year high on June 7th. Three traders attributed the surge in copper prices to tighter supply of scrap copper. At the same time, the Chinese government continues to crack down on foreign waste. 

"Some who use scrap steel are turning to the cathode, especially the cheap African cathode," said a trader in Hong Kong. Congo and Zambia are the two largest copper producers in Africa. The cathode is refined copper, which is usually processed into rods and wires for infrastructure and construction. The arbitrage window for Chinese copper imports has been profitable and has also increased its premium, adding to a typical trend. Benchmark futures fell amid fears that the trade dispute would hurt demand for industrial metals.

Copper stocks on Shanghai Futures Exchange have fallen more than 40% since the end of June, further pushing up the premium. Senior Consultant named Zhouyanting in Wood Mackenzie said“tariff may mean that additional cathode imports are required to replace scrap copper. "The new capacity acquisition has increased the capacity of Chinalco , which will have 1 million tons of capacity opened this year, equivalent to 10% of China's annual demand, most of which will start in the second half of the year.

At the end of June, Chinalco launched a 400,000 tons / year smelter project in Fujian, but the project has yet to be announced for commercial production. Lingbao Jincheng Metallurgy Co. Ltd. started the 100,000 tons copper project in Henan. With demand tepid and economic indicators weak, there is growing concern that overcapacity will hit saturated markets. 

China's fixed-asset investment growth from January to July fell to its lowest level since 1996. "Our production and sales in August are expected to fall by 8% from last month," said an executive from a Chinese copper pipe manufacturer. The manufacturer mainly supplies factories that make air-conditioning equipment. Analyst named Zhouyanting from Woodmac predicts that overall copper consumption growth in China will fall by half to 2% this year from 4 % in 2017.