Copper Enjoys Strong Recovery

A year or so ago, copper markets were like a bird with clipped wings, falling in a disastrous tailspin. But 1997 appears to be putting a fresh wind into the market as copper and brass scrap come out of the gut-wrenching plunge scrap dealers encountered last year.

Since the beginning of the year, prices in the $1 to $1.10 range have been welcomed by scrap dealers. But longer-term fundamentals indicate that the market may not be flying quite as high by the end of 1997.

The market recovered quite nicely from last spring’s disastrous dive, observes Don Zulanch, senior vice president of Cohen Brothers Inc., Middletown, Ohio. Fairly early in 1996, the Comex price for copper crashed 25 percent, going from $1.30 to under 90 cents in a short time. Scrap prices plummeted in tandem. Margins narrowed, buyers moved toward quality cathode, and scrap markets suffered. Blame for the crash was placed on the chief copper trader from the Japanese trading company Sumitomo, Yasuo Hamanaka, who was discovered to have hidden more than $1.8 billion in copper losses over 10 years.

Today, the market is much better. "We are rather optimistic," Zulanch says. "Aluminum, nickel and copper are all on the way up. Aluminum is very firm and copper definitely is on the upside." He notes a March Comex price around $1.07. "When you’re talking prices between $1.05 and $1.08 or $1.09, that’s not a bad market for the scrap yard," he says, especially when reflected against the 90-cent range just a few months ago.

As the market moved out of 1996 and into 1997, similar improvement was noted in most areas of the country. "We haven’t recovered all the way," says Doug Elder, director of marketing at Klempner Brothers, Louisville, Ky. "But prices have gone up a nickel or so a pound in the last month."

Elder takes that as a sign demand may improve. Others in the copper market feel that smaller operators still are holding back waiting for better prices yet.

"Prices are not where I’d like them to be," Elder says. "They have not come all the way back to where they were." But he remains optimistic about copper movement.

Zulanch says that he does not see a lot of hording. "We have good levels of supply and material is moving to the mills. Inventory in the yards is moving out. Our business is brisk and good," he says.

In light of the improved prices, Bernie Schilberg, executive vice president of Schilberg Integrated Metals, Willamantic, Conn., says he doubts anyone is hoarding materials. He says that scrap, especially the better grades, is moving nicely.

Officials at Southwire Corp., Carrollton, Ga., share the generally bright outlook for the first half of the year. "We anticipate the first half of 1997 will be good," a company spokeswoman says. "We see good availability of scrap with decent margins."

A pleasant surprise hit West Coast dealers early in the first quarter as several orders from China, for delivery at the end of February, came in unexpectedly. China had quieted down at the end of 1996. But it appears there was a general increase in demand from China after their New Year on February 7.

"A number of us on the West Coast have seen good orders for delivery in the latter part of February and beyond," says Robert Knox, who handles international sales for Markovitz & Fox, San Jose, Calif.

"Their demand is not as strong as it was at the same time last year, but it is going in a positive direction," he adds. There also is good demand for aluminum scrap moving through Hong Kong into Canton.

That overseas demand is having some positive effect on movement in the heartland, in markets which usually do little or no export business. Larry Adelman, president of Admetco, Fort Wayne, Ind., sees the upturn of the West Coast export demand as reinforcing the good market in 1997.

"Flow of scrap is good," he says. "Material is moving well on the inbound side." Outbound flow is not as strong, he says, but still moving. "Demand for No.1 copper is quite good. The No.2 and refinery grades are not moving as well." Material moves to Admetco from industrial generators and other dealers. They do no retail. The company moves outbound to brass mills, tube manufacturers and refiners.

Adelman notes that the traditional winter slump had not kicked in by the beginning of February, another positive sign for copper scrap.

Michael Friedman, president of Friedman Metals Brokerage Co., York, Pa., agrees that there is a good demand for copper from overseas. He notes a good market in Asia and points out that there is strong interest from Turkey. "Throughout Asia, there is a boom," he says.

In general, the copper scrap market saw some improvement in supply, demand and pricing relative to Comex around the New Year. The flow of scrap picked up on the West Coast and domestic demand was strong.

Prime No.1 copper and No.1 bare bright continue to be in strong demand. On the East Coast, Schilberg notes that the market had freed itself of some of the tightness experienced in the fourth quarter of 1996. "Differentials are quite steady," he says. "The market is still demand driven."

Much of the luster in the copper market comes from a booming brass market. Red brass ingot is comprised of 85 percent copper, and a brass rod is 60 percent copper. Both the ingot and rod markets are going like gangbusters.

"The brass market seems to be good," Adelman says. "We are seeing good demand for smelter grades of brass." He notes nothing unusual about the overall market other than price pressure. "Things are flowing well," he says.

There are those in the market who predicted prices would not reach pre-Sumitomo scandal levels for some time. But Knox says he feels the market run-up in early 1997 is an indication that the effects of the Sumitomo scandal are over.

"In the second half of 1996 there was still a lot of shake-out," says Knox. "We’ve seen the worst of it. People are back in the market, and scrap is flowing. Volumes picked up once copper got over the $1 range and we’re seeing a steady flow in the $1.10 area."

The strong brass market shows up in the statistics in improved copper prices. According to Daniel Edelstein, copper commodity specialist at the U.S. Geological Survey, Washington, strong brass mill consumption has followed the growth in demand for copper, which has been strong.

Although domestic consumption is down due to a drop in capacity, total scrap recovery, including brass mills, has tracked supply and demand nicely, Edelstein points out. However, there has been a generally declining trend in domestic old scrap due to the closing of several old facilities.

USGS figures show domestic consumption of refined copper rose by more than 13 percent during 1994 to record high levels. This was the third consecutive year of large demand increases, consumption having risen by 6.3 percent and 8.5 percent, respectively, in 1992 and 1993, according to the USGS.

Purchased new scrap, derived from copper fabrications operations, yielded 827,000 tons of copper in 1994, up almost 80,000 tons from that of the previous year and accounted for 62 percent of copper recovered from all scrap. This large increase in new scrap consumption reflects the increased domestic consumption of mill products, which, according to the Copper Development Association Inc., rose by almost 13 percent in 1994.

The 1995 USGS figures are even higher, with preliminary numbers showing 874,000 metric tons of new copper scrap.

The 1995 figure for old scrap was 442,000 metric tons, down from 500,000 in 1994. Recycled metal (metal recovered from new plus old scrap) was pegged at 1,320,000 metric tons. The percent of recycled copper was 38.6 percent.

Schilberg says that most of the material moving in his area is going to brass mills and tube mills. USGS figures show that about three-fourths of the copper contained in new scrap was consumed at brass mills. During the past year, according to USGS, eight primary and five secondary smelters, nine electrolytic and six fire refineries, and 15 electrowinning plants operated in the United States.

Copper is consumed, both as refined copper and as direct melt scrap, at about 35 brass mills, 15 wire rod mills, and 600 foundries, chemical plants, and miscellaneous consumers. Of the total copper recovered from copper, aluminum, nickel, and zinc-based scrap, copper smelters and refiners recovered 30 percent; brass mills, 15 percent; brass and bronze ingot makers, 10 percent; and miscellaneous manufacturers, foundries and chemical plants, nine percent.

While copper scrap prices correlate to the price of refined copper, the price paid for scrap at each level of processing must be sufficiently discounted to allow for all subsequent processing costs. A scrap collector who sorts, chops, bales, and ships material will pay less for scrap than does the consumer of the scrap. Because of the inherent costs associated with the initial collection and processing of scrap, low refined copper prices, such as those experienced in January, squeeze processing and profit margins and reduce the quantity of scrap that can be recovered economically.

Despite the increase in margins, consumption of No.2 scrap, as well as lower grades of scrap consumed predominantly by secondary smelters, declined, according to 1994 USGS figures. Environmental and capacity constraints, along with constraints on materials availability, prevented secondary smelters from increasing their throughput.

There was a decline in old scrap consumption by secondary smelters, the largest consumers of old scrap. On the other hand, consumption of No. 1 scrap and new scrap both increased, owing to high production levels at brass mills, which are the principal consumers of No. 1 scrap and new scrap. Consumption of brass ingot, a product of brass scrap, also increased, owing to a rise in domestic casting production.

The scrap market currently ranges from an equilibrium to a deficit, according to Schilberg. "Consumers are using more grades of scrap," he notes. This drives demand deeper in the scrap market and provides more outlets for several grades scrap. While he anticipates a good, steady demand for the higher grades, he says there will be somewhat less demand for the No.2 and smelter grades.

In what Friedman calls the "copper crescent" – a broad swath from Turkey, down through India, and up into China – there is a large demand for copper. "Business is good," Friedman says. "The auto industry seems robust throughout Asia. There is a building boom in Singapore, Vietnam, Hong Kong and China that is second to none."

Friedman says he sees a large number of calls from India and a surge of interest from Turkey, where cheap labor from the former CIS countries is providing a boom market in the mills which produce rod.

Exports of both alloyed and unalloyed scrap rose significantly in 1994, while imports of copper alloy scrap declined markedly, according to USGS figures. Consequently, net exports of scrap rose to more than 250,000 tons, up from about 100,000 tons in 1993. The United States was one of the largest international sources for copper scrap, followed by France, Germany, and the United Kingdom. U.S. exports of copper scrap have been increasing since the 1960’s, when the Asian nations began to industrialize.

In 1994, China, Hong Kong, Japan, Korea, Singapore, and Taiwan, combined, accounted for 44 percent and 49 percent respectively, of U.S. unalloyed and alloyed scrap exports. Exports of unalloyed scrap to Canada rose by more than 70 percent. Canada and Mexico were the leading sources for U.S. imports of copper and copper alloy scrap and accounted for 73 percent of imports in 1994.

China still is taking some low grade copper scrap. However, Friedman notes, they are requiring inspection of the lots. That adds cost to the shipment and has virtually eliminated export of the very low grade materials.

There is some question, in light of the increasing amount of primary production, whether prices will continue to stay level or rise through the end of 1997. Domestic production and mining continue to outpace demand.

"We’re optimistic. The market is firm. The bias is on the upside," Zulanch says.

At Southwire, the feeling is that as long as the Comex cover price stays over $1 per pound for copper, everything should remain favorable for the scrap market.

Market observers like Knox note that a surplus likely is coming later in the year and that it probably will have an impact on the market. He points out that it is an anomaly to have inventories increasing at the same time prices are increasing, and says there may be an adjustment as the market gets back to being based on fundamentals. As pressures increase from the expected larger supply, prices could fall back into the 90’s. His worst case scenario would be in the mid-80 cent range, but that appears unlikely.

Friedman is fairly bullish. "We used to flip a coin to determine where copper was going to go. If you think for a moment that you are an expert, you’re quickly humbled," he says. However, his feeling – based on a continued strong auto industry demand and good exports – is that the overall trend will be generally up.

Adelman agrees with that assessment. "We see no indications from consumer that demand will be slacking," he says. "But the market is an interesting phenomena – you never know from one day to the next what will turn on or off the spigot."

Schilberg is not so optimistic for the long term. "We are looking at the higher end of the range now (in the first quarter)," he says. "I think we will see a steady decline in prices through the year."