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China's scrap aluminum import restriction may hamper alloy exports: sources

Tokyo β€” China's restriction of scrap aluminum imports from July will likely raise production cost for Chinese secondary aluminum smelters, possibly making Chinese alloy exports less competitive, Asian market sources said Thursday.

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From July, companies with licenses from the Ministry of Environment and Ecology will be allowed to import the scrap volume which the ministry will set on a quarterly basis at the shortest.

China aims to ban all scrap imports starting 2021 and the quarterly quota is an interim measure to last until the end of 2020. Chinese smelter sources said they were currently in talks with the government to set new standards to allow high-grade scrap imports after 2021.

China imported 1.6 million mt of scrap aluminum in 2018, and 2.2 million mt in 2017, according to data from China's customs.

Domestic scrap recovery efforts are ramped up with the expansion of industrial waste dismantling facilities, but it is not possible to replace 1-2 million mt/year of supplies in a matter of few years, Chinese market sources said.

Chinese scrap demand will grow too, as the government pushes to achieve 75% utilization rate of renewable resources by 2020, they added.

An official with China Nonferrous Metals Industry Association told S&P Global Platts it forecast China's recycled aluminum products output to reach 6.5 million mt in 2020, up 27.5% from 5.1 million mt in 2018. There is no forecast for 2019, the association official said.

Scrap feedstock costs are expected to rise, said the source. "Theoretically, [primary] producers should be responsible for recycling costs. However, waste products in China are a commodity, and recyclers have been the real payer of recycling costs," said He Xiaohui, analyst at consultancy Beijing Antaike.

The government is likely to allow imports of scrap with minimum 99% metallic content rather than 90-98%, which may raise feedstock prices from current level by 20-30%, the smelter source said.

In addition, the Chinese government is suggesting the use of primary P1020 aluminum to replace scrap feedstock, the smelter source added. Primary aluminum costs twice as more than scrap.

"We have a similar problem in Japan where costs of recycling could not be absorbed by [the] market in times of excess supply," said one Japanese scrap dealer. Japanese importers of Chinese ADC12 alloy, used for automotive components, said they were considering shifting to Southeast Asian countries if Chinese export prices become uncompetitive.

For over a decade, Beijing has been encouraging export of secondary aluminum alloys by exempting duties levied on feedstock imports. Japan has been the largest buyer of Chinese aluminum alloys. It imported 369,603 mt in 2018, according to Japanese customs data, and most of the imports are believed to be ADC12, industry sources said.

--Mayumi Watanabe, mayumi.watanabe@spglobal.com

--Edited by Nurul Darni, nurul.indriani.darni@spglobal.com