Shares in mining companies are on the back foot as the price of copper and other hard commodities fell but things could dramatically change next week as UBS is tipping that copper prices will surge from March 1.
That would be welcomed news for the sector as industry leader BHP Billiton Limited (ASX: BHP) sheds 1.6% to $30.92 while the S&P/ASX 300 Metal & Mining (Index:^AXMM) (ASX:XMM) index tumbles 1%.
But copper producers are likely to come back into favour if UBS' prediction of a "dislocation" in the scrap metal market comes to pass.
As part of the Chinese government's drive to stop other countries from sending their crap (I mean poor quality scrap) to China for recycling, authorities there are imposing stricter controls on the import of copper scrap starting from next month.
China also has imposed stricter controls on paper and other recyclables in an effort to control pollution in its country.
UBS believes this will materially tighten the copper trade and drive prices higher, although no one can quite quantify the upside at this time as it is difficult to say how strict Chinese custom authorities will be.
"Traders and copper companies estimate the potential disruption with a wide range of 150-500ktpa of contained copper, but profess low confidence in these numbers," said UBS.
"We estimate the impact to be ~400ktpa, or ~2% of global refined copper demand. The impact could be higher if customs officials are strict [and] we think there is an asymmetric price risk on the upside for copper during 2018Q2."
China derives around 1.3 million tonnes of copper a year from scrap and the government's new policy will cut off traders by only allowing scrap imports to be sold directly to end users.
China will also limit impurities in scrap to 1%, which will affect many products, and reduce trade quotas.
While that could push low quality and more environmentally polluting scrap to other emerging countries, this will take time.
Quantifying the impact of the new policy is also made more difficult from mine disruptions that were prevalent in 2017.
Supply could be more dependable this year and that will add around 300,000 tonnes a year to the market. But as the broker notes, miners in Chile are negotiating new wage contracts with mining companies and that puts two thirds of the country's six million tonnes a year copper output at risk from strike action.
We might have to wait till April when China's customs department releases its monthly report to gauge the impact of the new policy but there are certainly reasons to feel optimistic, particularly towards more copper-focused miners like Oz Minerals Limited (ASX: OZL) and Sandfire Resources NL (ASX: SFR).
Having said that, other non-copper miners may also benefit from this thematic as higher copper prices are likely to also pull other industrial metals higher. They don't call the red metal "Dr Copper" for nothing.
On the flipside, the stricter import control is probably bad news for scrap dealer Sims Metal Management Ltd (ASX: SGM) and that's why UBS is telling investors to sell the stock.
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