* SDI copper wire rod mill to come on line in Q2

* Predominant feedstock will be No. 2 copper scrap

* Chinese seen as main competition

By Chris Kelly

NEW YORK, May 2 (Reuters) - Steel Dynamic Inc's (SDI) new copper wire rod mill in New Haven, Indiana, will use a grade of copper scrap popular in China as its raw material, putting it in direct competition with the Far East and potentially driving prices higher, market participants said.

Developed through a partnership with Barcelona, Spain-based LaFarga Group, the $39 million facility is on track for a second-quarter start-up and should be running at full capacity by the fourth quarter of the year.

The mill, SDI's second non-ferrous operation but its first foray into copper, is expected to produce roughly 180 million lbs (82,000 tonnes) of copper rod per year using a similar quantity of scrap as its raw material.

No. 2 Birch Cliff, a mix of wire and tubing with a 96-percent copper content, will be the predominant feed, Russ Rinn, president and chief operating officer of OmniSource, SDI's scrap unit that will be supplying the mill, said.

The mill's monthly feed is small compared with the over 230,000 tonnes of copper scrap exported by the United States to China in March.

But the Fort Wayne, Ind.-based steelmaker's entry onto the market could boost prices even further because it will need to compete with China, which buys most of the No. 2 copper produced in the United States and is the world's largest primary and secondary copper consumer, dealers said.

And prices have already been rising due to a broader shortage of secondary supplies, dealers said. No. 2 Birch Cliff's discount to COMEX's July contract was quoted this week at 35 cents to 38 cents per lb, compared with 40 to 45 cents in March.

"They are a big company, but they are not as big as that whole country. When China comes in, they're coming in to buy, and SDI will have to react," said a scrap broker.

OmniSource has already been buying ahead of the start-up, Rinn said, although dealers said its so-far tentative presence had not yet influenced prices.

"We have had to buy some to stockpile so we can get through the start-up process, but I wouldn't say that we have gone full bore," Rinn told Reuters.

And SDI may find they have to fork out even-higher prices to lure sellers away from China.

"They (OmniSource) are going to rub up against the Chinese. If the Chinese run the market up, I don't know how they are going to make any money," said a buyer for a U.S. wire and cable maker.

"They are looking for the big spread between cathode and scrap to make it viable, and I think it's going to disappear," he cautioned.

Rinn agreed that aggressive Chinese buying could disrupt his company's sourcing, but said he believes there is enough for both the company's and the country's needs.

"There is generally a decent supply out there. There's enough to go around," he said.

"What we are going to be consuming is a blip on the radar as far as the Chinese are concerned."

Domestic suppliers are also likely to welcome selling to the mill as it will avoid the logistical hassle of exporting to China, dealers said.