China's refined-scrap copper price spread widened significantly in August, but the expanding arbitrage failed to translate into stronger scrap copper trading. Instead, tighter tax and invoice controls continued to constrain downstream purchases, leaving domestic scrap copper circulation sluggish despite its increasingly apparent cost advantage over refined copper.
Copper prices maintained an overall upward trend in August, briefly approaching Yuan 110,000/tonne. Against this backdrop, Mysteel data showed that the refined-scrap copper price spread remained well above its reasonable range throughout the month. As of August 31, the spread in major domestic markets stood at Yuan 4,407/tonne, around Yuan 2,600/tonne above the reasonable level. In theory, this should have strengthened scrap copper's substitution advantage over refined copper and encouraged downstream consumers to increase scrap purchases. In practice, however, the response was notably muted.
According to Mysteel's survey, average daily spot scrap copper trading volume in China was only around 1,788 tonnes in August, broadly unchanged from July. Trading therefore failed to pick up as copper prices rose, while low activity across the scrap circulation chain further weakened the pass-through of higher copper prices to domestic scrap values. This, in turn, provided another catalyst for the refined-scrap spread to widen.
The key obstacle lies increasingly in industry tax and invoice constraints. China has recently tightened invoice and tax controls in the copper scrap sector, limiting the volume of scrap that enterprises can legitimately purchase each month according to their available invoice quotas and under stricter tax supervision. The resulting restrictions have materially constrained scrap circulation, with the impact showing signs of intensifying.
For scrap processors, a wide refined-scrap spread only represents a theoretical cost advantage if they cannot convert that discount into actual operating savings. If invoice constraints remain unresolved, the nominal price advantage of domestic copper scrap cannot be fully monetized. At the same time, enterprises that attempt to circumvent the rules face increasingly stringent regulatory penalties.
As a result, many downstream processors are choosing to reduce operating rates or suspend production rather than aggressively purchase domestic scrap. Others are turning to imported copper scrap with compliant invoices, despite its relatively high prices. This helps explain why imported copper scrap prices have remained elevated even as the domestic refined-scrap spread continues to widen.
Under normal market conditions, a widening refined-scrap spread should encourage downstream substitution toward scrap, lift scrap demand and eventually narrow the spread again. The current market is different. Policy-related constraints have disrupted this price transmission mechanism, meaning that the spread can remain elevated without generating the expected increase in scrap consumption. Moreover, the invoice constraints are likely to exert downward pressure on the prices of domestic scrap traded without compliant invoices. This further widens the gap between the theoretical economic value of scrap and its actual tradable value.
Meanwhile, the supply side continues to provide a relatively firm floor for copper prices. Copper concentrate treatment charges remain under sustained pressure amid tight mine supply, while refined copper inventory have recently shown signs of tightening. These factors could continue to support copper prices in the near term. However, stronger copper prices alone are unlikely to resolve the bottleneck in the scrap market. As long as domestic scrap circulation remains constrained by invoice and tax regulations, the ability of scrap prices to follow movements in copper will remain limited.
The key takeaway is that a widening refined-scrap spread should no longer be interpreted straightforwardly as evidence of stronger scrap economics or an imminent recovery in scrap demand. In the current environment, the spread is increasingly reflecting a breakdown in the transmission between scrap's nominal price advantage and its ability to be realized by downstream consumers.
Looking ahead, the evolution of China's scrap copper invoice quotas and tax standardization policies will be critical. Any meaningful relaxation or clarification of these constraints could unlock suppressed scrap demand and improve market circulation. Until then, the refined-scrap spread is likely to remain structurally elevated, while domestic scrap trading and price elasticity remain subdued.
Written by Mingyuan Wang, wangmingyuan@mysteel.com
