China issues first scrap quotas under new policy

Corrects total number importers and copper quota figure.

The Chinese government issued its first batch of quotas for the country's metal scrap importers, valid for the third quarter of 2019, with additional rounds of quotas to be released in the coming weeks.

The offerings released today by China's Solid Waste and Chemical Management, a division of its Environmental Ministry, come as part of the government's implementation of stricter scrap regulations, sources familiar with the matter told Argus. Beginning on 1 July, the government will shift category 6 scrap items including copper, aluminum and ferrous scrap into a restricted category, which will be regulated with import licenses and require quotas.

The first round of import quotas, affecting a total of 60 metal scrap importers, is heavily focused on Chinese copper scrap importers on China's east-central coast, particularly the Jinhua, Ningbo, and Taizhou regions, but also include quota volumes for aluminum and ferrous scrap.

Copper scrap quotas, under harmonized Tariff code (7404000090) totaled 240,429metric tons (t) for the third quarter and aluminum scrap, under harmonized Tariff code (7602000090) totaled 54,256t for the quarter. The list also includes six ferrous grades, which totaled 14,968t, but China is not a significant importer of steel scrap.

Quantifying the volumes

Sources estimated that the volumes approved today only represent between 30-40pc of the required tonnage of copper smelters in the east-central coast region for the quarter, while the aluminum allotment represents less than two months' of an average aluminum smelter's raw material requirements.

In the third quarter 2018, China imported a total of 624,276t of copper scrap and 349,510t of aluminum scrap, according to Global Trade Tracker.

The quota volumes issued today only represent 38.6pc of copper scrap intake and 15.5pc of the nation's aluminum scrap intake in the third quarter last year.

"This is only the first batch and these importers are mostly from the Ningbo area," considered the copper and brass hub of China, one US exporter said. "We have talked to one of the consumers on the list, and they are saying this is only enough copper scrap volumes for 30-40pc of their capacity."

Other market participants shared similar views on the quota volumes for aluminum scrap volumes.

Market sources said that it is too early to react to the figures due to the unknown nature of total import quotas that the government will release for the third quarter.

Additional quota volumes

Multiple sources have told Argus that the Chinese government will issue additional quotas for companies in the north, as well as a batch more focused on importers in southern China provinces including Guangdong.

One Chinese trader said a second batch of copper scrap import quotas will come out in early July, while Chinese consumers in the south will also likely receive a batch of copper and aluminum scrap quotas in early July or even earlier.

Other market sources shared a similar sentiment, noting that they are confident that additional batches will be approved in the coming weeks, but are unsure over how large the quota volumes will be.

"Next week or so will be the second or third batch," the first US exporter said.

Increased price volatility

Market sources are concerned that quarterly issuance of import quotas will severely hamper the efficiency of trade heading into the fourth quarter, as it will likely create start-and-stop trading activity.

Quotas issued today and in the coming weeks will expire at the end of the third quarter 2019, forcing consumers to reapply and wait for new quota levels to be established and issued by the government before buy new material for the quarter.

When factoring in the logistics of trade between China and other nations, sources said it can take up to six weeks to ship material to Asia, with an additional 1-2 week period before the load clears Chines customs.

With this nearly two-month lead time, market participants are concerned that the quarterly issuance of import quotas will result in a relatively short period of frenzied buying followed by longer periods of inactivity, leaving prices subject to a great degree of volatility.

"If any buyers wish to import before the end of September, they must prepare for shipping in early July. After that they will stop buying until they have dealt with the fourth quarter volumes," the first US export said.