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Analysis of the effects of policy on the ban of 7th category copper scrap import

2017-07-28 07:13:14

Analysis of the effects of policy on the ban of 7th category copper scrap import

By Antaike Copper Research Team

(This article copyright belongs to Beijing Antaike Information Co., Ltd., if reprint, please indicate the source!)

1. Background

At the night of July 25, WeChat widely rumored that CNIA has been informed that scrap metal including waste wire, waste motor and bulk waste hardware will be prohibited from import. Rumors indicate that this policy will give effects on the copper supply of more than one million tons, and then copper price will rise sharply. According to Antaike’s survey, the message is basically true and the policy will be implemented at the end of 2018.

Now, Antaike tries to interpret it based on available data, for your reference.

2. Copper scrap classification

Imported copper scraps are divided into 6th category copper scrap and 7th category copper scrap. 6th category copper scrap (Customs code: 74040000 90) for the automatic import license, including high-grade 1# bright line, 2#copper, red scrap copper, brass scrap and other copper, of which, high-grade copper and brass scrap, with clear classification and less impurity, can be directly processed and used; part of the lower grade red scrap copper and brass scrap with mixed grade need to be smelted again. 7th category copper scrap (Customs code: 74040000 10) requires restricted wastes import license. To import such waste, traders need to obtain the relevant approval on this type of copper scraps, including low grade waste cables, waste motor, waste transformers and waste metal, etc., which can be used by smelters or copper processing plants after dismantling and sorting and other treatment.

3. History of scrap copper import

During the period from 2000 to 2008, China’s import of copper scraps increased significantly. The volume of physical import reached the peak of 5.58Mt in 2007 and 2008. Then the import had a continuous 4-year decline, especially after 2012 and even fell to 3.35Mt in 2016, because global financial crisis broke out and copper price continued to fall.

Copper content of imported scraps showed an upward trend. The lowest content rate was 12.2% in 2006 and stayed around 40% in recent years. Copper content increased to 1.30Mt in 2016 from 400kt in 2000. The peak level was 1.882Mt in 2013. After that, copper content continued to decrease, because supply shortage caused by financial crisis and the increasingly stringent regulation on imported scraps after 2013 (environmental protection).

In recent years, China's importing sources and channels have been also expanded. Major importing sources concentrated in the industrial developed countries in 2016. Top five countries and regions were China’s Hong Kong (664kt), the United States (531kt), Australia (523kt), Japan (207kt), and the Netherlands (205kt).Total scrap copper imports from the above five countries was 2.129 Mt, accounting for 63.6% of China’s total imported volume.

China's importing areas of scrap copper are mainly concentrated in the Pearl River Delta, the Yangtze River Delta and Tianjin. In 2016, copper scrap import (physical volume) by Guangdong (1.601Mt), Zhejiang (1.125 Mt) and Tianjin (235kt) accounted for 88.4% of China’s total.


Chart 1 physical volume and metal content of imported copper scraps (0’000t)

Before 2008, among China's imports of copper scrap, 7th category copper scrap accounted for the vast majority, which reached more than 85% in recent years. Due to the increasingly stringent supervision, the proportion of 7th category copper scrap fell to 60%-70%. Based on the data in 2016, if the total amount of imported copper scrap was 3.35 Mt, of which copper content of 6th category copper scrap and 7th category copper scrap were 1Mt and 300kt, separately, of which grade of 7th category copper scrap was less than 14%.

4. Usage of domestic copper scraps

China's usage of copper scraps is divided into direct and indirect use. Direct use is a production process of copper rod, bar and plates using red scraps and alloy scraps as raw materials. Indirect use is a production process of copper cathode using brass copper as raw materials and anode copper as semi products.

From 2001 to 2008, China’s direct use had a continuous increase, mainly driven by the sharp growth of rod and wire rod output. In addition, copper plate, brass, copper foil, and the production of valves and other hardware also increased the use of scrap copper, and reached a peak of 961kt in 2008.

In the second half of 2008, the global economic crisis broke out. The sharp fall of copper price led to a large number of contract breaches and a sharp decline in imports. During the same period, the slumped copper price led to production reduction and even shutting down of some copper processing enterprises. Narrowed price difference between copper scrap and refined copper also led to the reducing of the direct use of scrap copper. After that, although copper scrap import had certain recovery, some processing enterprises basically use refined copper as raw materials and reduced the use of copper scrap, because those enterprises had higher requirements for raw materials due to advanced technology introduced from abroad. At the same time, copper smelting capacity continued to expand substantially, making smelting enterprises to increase the procurement of copper scrap, the direct use of the amount was gradually reduced to about one quarter.

China’s refined copper output from scrap reached a peak volume of 1.90Mt in 2013, but fell to 1.60Mt in 2016, whose proportion of total output was 21%£¨with 10 percentage points lower than that in 2013.

5. The impact of the implementation of the policy

5.1 On supply side

For rumors about effects on the copper supply of more than one million tons or even two million tone, Antaike estimates that the reduced supply will be less than 1Mt. Based on Antaike’s analysis, import volume(metal content) of 7th category copper scrap was around 300kt in 2016.

Besides, even if this part of import is prohibited, it does not mean that these scraps disappeared, are completely unable to be used, and will only be used in foreign countries. In fact, they will probably still enter into Chinese market after dismantling and sorting in foreign countries.

In addition, the domestic supply of copper scrap is divided into imports and self-produced. From the development point of view, self-produced copper scrap will gradually increase its proportion. First, China's circular economy and recycling policies and markets will be more and more perfect after environmental protection requirements was enhanced. Second, based on copper average life expectancy of about 20 years, self-produced copper scrap is expected to accelerate the growth rate after 2019, which can effectively offset the imports decline.

Over the past decade, domestic copper recycling has grown rapidly, from 257kt in 2001 to 9.55Mt in 2016. The power industry is the most important source of scrap copper recycling, accounting for almost 50% of the total. Especially since 2009, China made efforts to upgrade the power grid, greatly increasing the recycling of this part of copper. At the same time, copper recovery rate in electricity, construction and transportation industry has been also growing steadily.

As a whole, because there are more than a year of transition time, the prohibition policy on 7th category copper scrap will not bring effect on the domestic supply of copper raw materials.

5.2 On the dismantling businesses

Combating the "foreign garbage" smuggling can’t be separated from governance transformation, only by changing the extensive development model of low-end garbage recycling enterprises, it can really change from pollution to eco-cyclical type. There are many domestic dismantling enterprises which stay at low-end and extensive. The ban, in fact, is to accelerate the competitiveness of relevant enterprises, making the fittest survive and make reshuffling to the market. In fact, China has carried the layout of “Going-global” strategy, which can be seen from the increased import proportion and volume in Southeast Asian countries. Therefore, the policy will have a larger impact on domestic coastal dismantling business.

6. Tax refund on copper scrap business

As far as we know, tax refund on copper scrap business has not been canceled.

Note: China’s recycling enterprises were exempted from VAT since 2001; on December 9, 2008, the State Administration of Taxation issued a notice to cancel the policy of VAT exemption from January 1, 2009. From 2009 to 2010, China took the policy of refund after collection VAT from waste materials recyclers, refunding 70% of VAT to taxpayer in 2009 and 50% in 2010. On June 26, 2015, the Ministry of Finance, and the State Administration of Taxation jointly issued the notice of "VAT discount directory of comprehensive utilization products and labor services ", of which, VAT refund rate for recycling copper company was 30%. Since then, the rumors about the VAT refund of copper scrap are endless, but there is no further news.

For copper scrap companies, after 30% of the value-added tax rebate, the remaining part was split by the national tax and land tax based on a certain percentage (generally 50:50). After the split, some local government will return a certain percentage of land tax to company. This part is different based on different local policies, not general rule to observe.

As a whole, China's environmental protection requirements are increasing and strict regulation on imports of solid waste is a signal of this trend. In fact, "hedge operation" is one typical example of this kind regulation as a way to strengthen the import of such materials by China’s Customs. Therefore, the ban on the imports of 7th category copper scrap is in line with the supervision requirements. While 7th category copper scrap has a lower grade of copper, although at a large amount of imports, the copper content was only 300kt in 2016. In addition, the policy will not take effect immediately and as a result there is no impact on the market in a short term. In the long run, copper scrap dismantled by some Chinese overseas companies will flow into domestic market, so the import copper content will not be affected in the future. Antaike suggests that the policy only has little impact on Chinese copper market and copper price, but will have significant impacts on dismantling businesses.