Copper: Secondary surge masks tightening market – Standard Chartered

The analysis team at Standard Chartered suggests that a key focus in the copper market so far in 2017 has been the role played by a sharp increase in scrap supply in terms of limiting more visible tightening effects on the refined market from a surge in mine disruptions.

Key Quotes

“Data suggests that a key effect has been a surge in China’s secondary refined output, which rose 26% y/y in January, compared with a 1% contraction in ex-China secondary output and stagnant global primary output growth (flat y/y). This surge in China’s secondary output contrasts with a stagnant trend in 2016 (-4% y/y) and equates to a 40 thousand tonne (kt) y/y increase in January alone (just under 500kt on an annualised basis). This was fuelled by a surge in scrap availability following the rally in copper prices in Q4, as well as sizeable scrap discounts.”

“China’s scrap imports rose 23% y/y in Q1, which we believe was important in supporting the total onshore refined output increase of 10% y/y during the quarter. This weighed on China’s refined imports in Q1 (-34% y/y), in turn generating pressure on both copper prices and LME spreads.”

“There are signs that the incentives which supported the surge in scrap are now moderating. Copper prices are lower, while discounts for both domestic and imported scrap have narrowed steadily since November (but remain USD 150-200/t wider than pre-Q4). This trend suggests the surge in China’s secondary output growth is temporary and by mid-year it should be close to flat y/y once more. The concentrate market has tightened sharply this year and we project the largest deficit (400kt) since the early 2000s.”

“We project global mine supply will fall into clear y/y contraction in H2, further weighing on global primary output growth. Even with weak China refined import volumes, we think the ex-China surplus in Q1 (net of China’s imports) was relatively limited (77kt) because ex-China refined output fell 1%. We think the narrower that scrap discounts trade onshore, the closer we are to the point when a sustained tightening trend will play out in the refined market.”