China’s satellite copper smelters, processers thrive abroad after scrap import restrictions [UPDATED]

Cambodia’s Sihanoukville Special Economic Zone is over a thousand miles from China, but you would not know it to be there.

Cut into a landscape of thick jungle and paddy fields, the area - which touts itself as a landmark Belt and Road project - is a mass of freshly built white factory buildings emblazoned with names such as Fangyuan Factory, Qingdao Baoli Textile and Jinchenyuan.

There runs Kinnrich Copper Smelting Co Ltd, a subsidiary of multi-asset copper producer Grand Tai Merchant (Shanghai) Ltd, which produces around 50,000 tonnes of copper ingots per year using secondary byproducts as raw material.

“Even though you’re in Cambodia, when you’re there it is like being in China – everyone is Chinese, all the hotels and restaurants are Chinese,” Jason Zhou, who runs procurement for the smelter, told Fastmarkets MB.

Kinnrich is part of a wider trend of Chinese-owned copper smelting and refining companies setting up around Southeast Asia and thriving since China country moved to limit the importation of scrap and secondary products, upending copper’s secondary supply chain.

China enacted a ban on imports of Category 7 copper scrap in January of this year, and will restrict top quality Category 6 material including stripped wires and cables, from July 1.

The move comes as part of a multi-year Chinese crackdown on imports of international waste, formalized as a three-year “Action Plan for Winning the Blue Sky War” designed to reduce air pollution by up to 18% by 2020.

Other China-owned smelters include Pt Dinxin Copper Smelter in Indonesia and Thailand’s Lanxi Zili Copper Co.

Growth of small-scale smelting projects outside of China has been spurred by recent regulation, says Zhou.

“It’s good for us, most of supply is very cheap at the moment.”

“Suppliers from Japan, South Korea and Malaysia are looking for buyers at the moment, China was a big market for them but it stopped last year,” he said.

China’s scrap restriction shifts supply routes

Regulation has also had a pronounced effect on shifting flows of lower grade copper scrap. What was formerly destined for ports in Guangdong province, southern China, is now heading to processing hubs in Malaysia.

Malaysia’s imports of copper scrap and waste increased from 19,000 tonnes in 2017 to 230,000 tonnes in 2018, according to a global survey of recycled copper compiled by the International Copper Study Group (ICSG).

“Scrap processing plants suddenly came up in Malaysia like mushrooms after the rain, even people from Europe are sending scrap there,” ICSG director of economics and environment Carlos Risopatron told Fastmarkets MB, adding that he expected the level of imports to keep rising this year.

These plants remove plastics and other coverings from electricity cables, wires and pipes before selling them on as higher-purity material to refineries, who in turn produce copper cathodes - shapes traded as commodity grade metal to the London Metal Exchange, Shanghai Futures Exchange and Chicago Mercantile Exchange.

Guangdong province once processed half of all China’s imported copper scrap, but this all changed in a few short months around December 2017, when licensed tonnage for import was cut by 94% overall and no licenses were given to companies in the region.

“These developments have been entirely a result of the extraordinary goings-on in China with regards to [scrap] regulations,” Michael Lion, Bureau of International Recycling special advisor and consultant, said.

“The new operations that have sprung up in Malaysia in particular are certainly Chinese processors who have moved or created facilities in these countries either because they see opportunity, or because they have much more limited scope to process domestically,” Lion added.

Scrap discounts to exchange copper prices assessed by Fastmarkets MB rose to 37-42 cents per lb cif China at the end of April, the highest level since the assessment was launched in July 2016.

Buyers with permits to import are well-stocked and remain hopeful discounts will rise further.

Recently, this new supply chain has attracted one of the industry’s biggest players with China’s top smelter by capacity, Jiangxi Copper, setting up a 150,000-tonne-per-year facility in Malaysia.

The company, which produced 1.46 million tonnes of copper cathode in 2018, expects to process the now abundant stocks of insulated copper wires, shipped from sellers in the United States, Europe and Japan, sources with knowledge of the matter told Fastmarkets MB.

But the new route to process scrap is not without hitches; two weeks ago, Malaysian customs officials detained several thousand tonnes of copper scrap.

“Last Friday [May 17], we received a notice from Malaysian copper scrap suppliers saying that a large number of containers with copper scrap that were originally allowed in are now being rejected,” a source importing material to the country said.

While market sources expect imports to resume imminently, what will be finalized as policy remains uncertain.

“There is a great complication over what is likely to happen; China could change their whole position again and there’s also the question of how other countries decide to treat these materials.”

What happens in Malaysia could go some way to answering this.

Additional reporting by Julian Luk in London

[This article was updated on May 29, 2019, to clarify that Kinnrich Copper Smelting uses secondary byproducts as raw material, not waste as initially published.]
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