Commodities unearthed:Copper,China scrap import ban and stro

Copper price jumps on scrap import ban: The copper price rose above USD6400/ton the LME, up more than 7% over the past week, mainly driven by news that Chinawill ban category 7 copper scrap imports, such as scrap motors and wires, starting in2019 (CRU reports that scrap processors that fail environmental inspection this yearwill be forced to stop importing immediately). In our view, the market is concernedthat this will lead to significantly less copper scrap supply, which will require higherrefined copper imports in China to offset the imbalance.

    We think concerns relating to the ban look overplayed: First, the ban targetscategory 7 scrap, which is mainly low grade copper scrap, such as scrap wire andscrap motors, which requires dismantling and processing before it can be used bysmelters. China imported c3.3mt of copper scrap in 2016, of which Category 7 scrapaccounted for c60%, or c2mt. Due to its low grade nature (15-20%), actual containedmetal is only around 300kt to 400kt, equivalent to just 1.5% of the 23mt coppermarket which, theoretically, would be enough to move our supply/demand forecastsinto a slight deficit in the coming years if these scrap imports disappeared altogether,which is unlikely (see p3). Second, we believe this will force category 7 scrap to bedismantled and processed outside of China and converted into category 6 (highergrade) for import post 2018. Chinese scrap recycling companies have already beenincreasing their presence in and setting up facilities in Southeast Asia, and this trendcould increase given the ban.

    We think some of the latest moves in copper prices have been justified giventhe relatively strong Chinese macro figures in recent months, especially thepick-up in industrial output and manufacturing activities, combined with a weakerUSD, further supported by decent macro figures globally and newsflow relating toindustry strikes. However, we believe that positive market sentiment due to the importban is responsible for part of the recent increase, and which may keep priceselevated above their fundamental level in the short term. Fundamentally, we see themarket as relatively balanced in the next several years, reaching a deficit only at theturn of the decade. Our copper forecasts are USD2.59/lb for 2017, USD2.65/lb for2018, USD2.75/lb for 2019, USD2.85/lb for 2020 and USD3.00/lb for 2021. Our longtermprice forecasts is USD3.10/lb.

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