Copper Brass Supplement -- Copper: A Market in Search of a New Direction

Like a fireworks display shooting across the summer sky, the supply and demand profile for copper seems to be scattered in every possible direction. Through early May, copper prices continued to inch upward, both on the COMEX and the London Metals Exchange (LME). Spot COMEX prices went from 77 cents a pound in early April to 83 cents by early May. They continued to climb to 85.5 cents by mid-May, but then began to tail off. By later in the month, copper had given up much of its earlier gains.

Historical relationships seem to have little effect on the current market. Even a potentially explosive international situation has not given the market the shot many observers expected.

Although the combined LME and COMEX copper stocks were at 472,500 metric tons at the end of February, they had dropped 31,000 tons by the end of March. In April, the combined drawdown was 81,600 tons. “With declining visible stocks and rising prices, a few folks are thinking that, perhaps, a new trend was developing—one that would result in even higher prices ahead,” says Bob Garino, director of commodities for the Institute of Scrap Recycling Industries (ISRI), Washington.

“Things are moving slow,” says Greg Vaughn with Shine Bros. Corp., Spencer, Iowa. It used to be that a dealer could make a few calls and sell a load of copper scrap, he says. Today, it is possible to make a lot of calls and still come up empty.

“The price has dropped to the point where the cost is more than a dealer can make,” Vaughn says. That makes for a tough market from all sides.

“People are still buying and selling scrap. Choppers are still chopping and a lot of material comes from the choppers,” notes Michael Friedman, president of Friedman Metals Brokerage, York, Pa. He notes that people still are moving loads of low-grade material. “From my perspective, I’ve seen no shortages at the various levels,” he says.

“Ingot-makers still need scrap and that is keeping the market half-way strong,” agrees Doug Elder of Klempner Brothers, Louisville, Ky.

Like a fireworks display, there have been moments of brilliance and light. But there are those dark periods, too. Everything seems to be short, scrap-wise, notes Tony Carey with Commetco, Phoenix, Ariz. “It’s the primary grades that are in demand. There is a big demand for cathode,” he says. The automotive, power company and appliance businesses are benefiting from the current strong economy. “As long as the economy stays where it is, the primary grades will be in demand,” he says.

“Scrap hasn’t been plentiful even during the run-up from 73 cents to 85 or 86 cents,” says Bob Stein, manager of nonferrous metals for Louis Padnos Iron & Metal, Holland, Mich. “Scrap supply has not changed,” he says adding that the shortage of scrap coincided with the maximum time of copper consumption late this past winter.

“Without a question, there are certain shortages of copper,” says Don Lewon, president of Utah Metals in Salt Lake City. Better grades of high quality copper are in short supply. “You can get a bit more than COMEX for high-quality copper,” he notes.

In a sharply declining market, the spread generally narrows. This Spring, the tight discounts followed the market and did not widen since there was not a big demand.

“The biggest single factor in the market is price,” Stein declares. Harking back to Economics 101, he repeats that metal is attracted to market by virtue of higher price. “There is hoarding which is not insignificant,” Stein continues. Given the low interest rates, there is little incentive to move material onto the market.

The result is that scrap movement has slowed down. Like other industry observers, he points to the commodity markets and to the Sumitomo crisis of two years ago as reasons. “The Sumitomo crisis stuck people with a lot of high-priced inventory. They did not buy to average down the cost of the inventory,” Carey says. Many people are not willing to sell those stocks at a loss. As a result, sales are being made at spot. Stein agrees. “Until they can average their cost down, it does not make sense to sell,” he says.

Friedman agrees that there are some dealers still holding material. He dismisses them as habitual holders and scoffs at the idea that the market will shoot back up to the $1.20 range anytime soon.

However, even with a premium paid over the COMEX price, the spread for No. 1 copper still is attractive versus the price of scrap and that, too, is putting a damper on things. That, of course, presumes money is going into the copper commodity market. Elder notes the ongoing strength of the stock market has captured the attention of a lot of investors and says that much of the money which may have gone into commodities, and driven copper prices higher, has been diverted to the stock market.

SCRAP STAYS TIGHT

“Scrap is still tight, insist processors, brokers and consumers alike,” Garino says. While he notes that scrap flows improved in April as COMEX prices held above 80 cents, supplies again tightened in May. Bare bright scrap was being quoted level with COMEX and above in May, and anywhere from one cent under to level with COMEX for July delivery.

Burnt wire is selling three to four cents under the July COMEX with No. 2 around 14 cents under the market.

Ingot makers are reporting steady demand for ingot as well as a scrap market that is slightly easier as a result of the higher April prices, Garino says. Red brasses are priced in the high 50’s, while yellow brass is in the mid-40’s. For export, mixed yellow brass generally is selling above 50 cents with radiators fetching 46-48 cents, delivered.

At Utah Metals, radiators were bringing 47-48 cents delivered. That can be contrasted to a maximum last year in the 55-56 cent range. “Percentage-wise, that’s in line with the overall market,” Lewon notes.

“The price of radiators hasn’t moved three or four cents in the past year,” Carey says. This is puzzling to many given the general market movement and the increased number of auto sales (which often brings older vehicles to the scrap dealer).

At the ISRI annual convention in March, Leanne Baker, director with Salomon Smith Barney, warned that copper is entering a new bear market whose origins trace back to the second half of 1997. At that point, she said, the market shifted from deficit to surplus. Baker’s Western World supply-demand balance showed a 200,000 metric ton surplus last year, followed by surpluses of 410,000 tons in 1998 and 225,000 tons in 1999. Baker noted the continued increase in supply, despite announced cutbacks and deferred projects.

Baker forecast LME prices to average 80 cents a pound this year and 85 cents across 1999. That’s about where the market sat as summer blazed across the calendar and, should her prediction hold true, does not allow for much dramatic up-side movement. Indeed, should the 558,000-ton surplus predicted by Credit Lyonnais Rouse be realized, it would be surprising if the prices were to advance any more at all.

ISRI’s Garino notes the overriding issue rests with new copper supply and the producers’ response with respect to rationalization.

Copper producer Asarco, however, says it sees the world market on a fairly even keel this year. In fact, they say that there is a possible supply deficit by the end of 1998. “You can’t turn a mine on and off like a spigot,” Lewon notes. “If I were sitting in their chair, I’d want to cut back the high-cost production. But stocks are low and it is hard to turn production on and off. It would be tough if you shut down production and missed a market.”

He says that, should the market give up another nickel or six cents, producers may have to reconsider their strategy and take some production off line.

At any fireworks display, some people like the starbursts and others like the booming noisemakers. It is similar differences of opinion and outlook like that which makes the futures market tick. Garino notes that firms willing to share their forecasts say that LME copper, three-months basis, will likely remain between 72 cents and 85 cents for the balance of the year. “Potential spikes exist, both upside and downside,” Garino says. However, copper is not expected to show unusual volatility.

If there were major surpluses in the cards, cathode premiums might show some volatility. However, cathode premiums were relatively steady at 3 to 3.5 cents a pound, and somewhat higher in the Northeast. In all, it seems to indicate that producers will continue to produce material and the scrap market should be able to do well given the underlying tightness of supply. That, of course, presumes things remain on a relatively even keel in Asia.

INTERNATIONAL EVENTS

The Chinese invented firecrackers. However, there has been nothing explosive about their dealings in the copper scrap market. While China has increased its imports, most of the recent purchases have been relatively small quantities. So, it remains to be seen just how deeply they are committed to the market.

An apparent early resolution to the Indonesian crisis would promise to smooth out another potential rough spot in Asia. Even a country like Australia, somewhat removed from the political fray, saw its currency dive as a result of the uneasiness in the region.

“Without the current Asian crisis, new production might not be enough to cover demand,” Lewon notes. “With the amount of production of copper coupled with the Asian situation, I’m amazed that consumption has stayed as good as it has.” He credits a strong market in the United States and a similarly strong European demand with helping cover over what could have been a very rough time for the market.

Many of the Asian countries are eating into their home scrap and are not looking off-shore for more material. There has been no massive movement of No. 2 copper or of insulated wire to China. Although many saw the recent building boom in China as bullish, many of those structures still lack tenants. Friedman notes that China still is working with a government-imposed top-down demand structure. “They are not market driven yet,”  he says.

Mexico and Canada always are factors in the U.S. copper market. Mexico was active in the market late this spring, purchasing No. 2 copper at about 11 cents under the market. In addition, there have been increased shipments of Zambian and Russian material.

More than short-term buying or selling, the dominant factor on the international scene appears to be the ongoing concern over  Asia. Everyone doing business around the Pacific Rim is keeping a wary eye on what happens in Japan, India, China and the nearby countries.

WHERE WE ARE GOING

Perplexing to most scrap dealers is the insistence of primary producers on continuing to pump out copper as though there were a major market shortage.  This is an international pattern.

Elder credits it to the philosophy that they can make up their price losses on the higher volume. “But that works against the market long-term,” he states.

Friedman says he figures the price of copper will remain in the 70 cents to 80 cents area. “Sure, there will be some peaks to 85 cents. But long-term—looking out to the year 2000—I expect you’ll see the price stay in the 70-80 cent range,” he says.

“If copper were to jump 10 cents a pound tomorrow, there would be significant amounts of scrap for sale,” Stein maintains. Shine Bros.’ Vaughn would agree. “When the market peaks, you’ll get some interest,” he says. However, the big question is whether there will be any serious upswings in copper’s price any time soon.

Will the market straighten itself out by year’s end? “It’s never been straight since I started in this business since 1974,” Stein says. “I don’t expect it to suddenly change this year.”

The author is an environmental writer and Recycling Today contributing editor based in Strongsville, Ohio.