(Bloomberg) — Fears of a shortage are gripping the global copper market, sending prices to record levels and sparking a $49 billion takeover battle. But in China, the world’s largest producer and consumer of the refined metal, there is more than enough.
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At the center of that conundrum are the country’s ever-expanding copper smelters. The industry is maintaining production at near-record levels – defying raw material shortages – as higher prices free up more scrap for processing.
Smelters had pledged to reduce capacity after their fees collapsed due to a supply shortage on imports of ore they use as feedstock. The prospect of insufficient copper in China is just one of the pillars of a whirlwind rally that took the metal above $11,000 a tonne for the first time early last week. But the cuts have not taken place and the faltering Chinese economy is unable to absorb the surplus.
The mismatch between supply and demand has become more apparent in recent days, with prices falling to just above $10,300 per tonne. While that’s still a 21% gain for the year, it suggests that as long as China remains oversupplied, copper will struggle to make further progress.
Read more: Chinese factories shy away from paying record prices for copper
The availability of scrap from discarded pots, pipes and wires has increased rapidly after copper prices soared, said Liang Kaihui, an analyst at Shanghai Metals Market. Manufacturers have been busy turning that into blisters, a semi-processed version of the metal, and shipping it back to smelters, he said, where it is used as a substitute for the overseas ore that is now in short supply.
The glut of scrap is reflected in the discount on refined copper, which rose to 4,615 yuan ($637) per tonne last week, the highest level in at least eight years, according to SMM.
In the meantime, the smelting industry continues to add capacity. As long as they are profitable, individual companies prefer to defend their market share at the expense of margins. Local governments also want them to continue producing metal so they can meet their economic growth goals and maintain employment.
On the wire
According to Bloomberg Economics, China’s May PMI surveys are likely to show that manufacturing will continue to grow at a modest pace, supported by solid output.
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This week’s diary
(All times Beijing unless otherwise noted.)
Monday May 27:
Tuesday May 28:
Wednesday May 29:
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CCTD’s weekly online briefing on Chinese coal, 3 p.m
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SHPGX organizes China Gas Power Forum, day 2
Thursday May 30:
Friday May 24:
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China’s official PMIs for May, 9:30 am
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China weekly iron ore port stocks
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Shanghai exchanges weekly commodity inventory, ~3:30 p.m
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