Mayhem in May

The copper market has witnessed an eventful year so far. When the year began with spot prices for Comex copper of around $3.87 per pound, little did anyone imagine that by May, prices would breach the $5-per-pound threshold and remain there until the end of the month. Comex prices eventually declined to around $3.94 per pound in the first week of August, only about 7 cents per pound higher than January.

The London Metal Exchange (LME) followed a similar pattern. The three-month LME copper contract started the year at $8,540.50 per metric ton, or $3.87 per pound, before peaking at $10,930 per metric ton ($4.96 per pound) May 20. It then decreased to $8,810 per metric ton ($4 per pound) in early August.

So, what happened in May that turned the red metal world around?

According to the June Resource and Energy Quarterly released by Australia’s Department of Industry Science and Resources, the jump was a result of stronger demand for copper, and traders have said anticipation of this demand drove prices higher as more traders hedged on the metal. However, most believe it was the growing arbitrage between Comex copper and the LME that really flipped the market.

Arbitrage impacts trade

Historically, the gap between LME prices, which are preferred by importers, and Comex copper prices, preferred by U.S. exporters, have trended within a narrow range. The arbitrage between the two markets generally is accepted to be between 2 and 4 cents per pound.

This gap grew significantly in May and June when the prices of both terminal markets soared. For example, May 20, when the LME three-month copper contract was at approximately $4.96 per pound, Comex copper settled at around $5.09 per pound, with the gap between the two terminal prices growing to almost 13 cents per pound. Even when prices began to decelerate in June, the arbitrage between the two terminal markets remained high, with the difference staying around 8 to 10 cents per pound. It wasn’t until mid-July that the arbitrage between the Comex and LME began returning to its normal range.

These fluctuations significantly affected trade. In June, Asian buyers, especially in China, began to retreat from the U.S. export market, and spreads widened considerably over the month it took for the arbitrage to settle. The impact on export volumes can be seen in the latest U.S. Census Bureau figures.

Copper scrap exports from the U.S. decreased by 4 percent in June to 68,228 metric tons (mt) from 70,860 mt a year ago and were down 19 percent from 84,714 mt in May.

In June, No. 1 copper shipments saw the steepest decline in volume, falling by 20.5 percent to 7,033 mt from 8,850 mt annually. Refined copper and yellow brass (honey) exports declined by 15 percent to 23,474 mt and 2,468 mt, respectively.

In terms of spreads, the Davis Index spread for No. 1 copper (berry/candy) weakened by about 8 cents per pound to 24.6 cents free alongside ship (FAS) U.S. port between mid-May and the end of July. The steepest drops occurred in May and June, when Comex prices were much higher than the LME three-month contract.

The spread for No. 22 copper (birch/cliff), always popular in China—one of the biggest importers of U.S. copper scrap—widened similarly during this period. It was only by mid-July that inquiries from Asia began to trickle in.

By the end of June, export trade also began to be affected by summer shutdowns at Asian smelters, a seasonal trend exacerbated by a soft Chinese economy. Data from Earth-i’s SAVANT Global Copper smelting monitor indicated that around 19.9 percent of global copper smelting capacity was inactive in June.

Revival in the cards?

Still, the market would prefer to keep this upheaval in the rearview mirror. Recent trends suggest overseas trade from the U.S. is recovering. However, much depends on global macro-economic trends and China’s continued presence in the market. The U.S. presidential election in November also could affect the market.

Because of market volatility, China’s copper scrap imports decreased by nearly 12.3 percent annually to 198,300 mt in May. The country’s losses attributed to imports grew, negatively affecting import demand and market stability. Still, domestic Chinese smelters remain hungry for imported copper scrap, which is driven by a scarcity in mined copper supply.

According to data from the Lisbon-based International Copper Study Group, global refined copper production from scrap between January and May of this year increased by 6 percent to 1.93 million mt compared with 1.82 million mt a year ago. Most of this increase was driven by China, where overall refined copper production rose 7 percent because of the startup and expansion of primary and secondary smelters and refineries in the country.

A weak construction sector in China also has led to a dearth of domestic copper scrap, making the country even more reliant on imports. This is reflected in the latest announcement by the Chinese government, which aims to reclassify certain scrap grades from waste to recyclable in the hope of bringing more scrap to its shores.

China also is likely to face more competition for some copper scrap grades from the U.S. For example, some participants say once Wieland’s smelter in Shelbyville, Kentucky, and Aurubis’ smelter in Richmond, Georgia, open, little No. 2 copper (birch/cliff) likely will be available for export. Some estimate the domestic market will need more than 1 million to 2 million pounds of this material every year to feed these two smelters, making competition between the overseas and domestic markets more aggressive.

It also could result in a further dearth of supply in a market that has been feeling the weight of supply tightness in light of weak scrap flows.

Still, many slipups could affect Dr. Copper as it tries to put the past few months behind it.

For one, a weakening manufacturing sector in the U.S. and other major global economies has affected copper demand and pricing in August.

The construction sector also has remained lackluster so far this year as demand is weighed down by high interest rates. With the U.S. Federal Reserve under the microscope on interest rate cuts and concerns over potential recessions in some of the world’s largest economies, September could be an interesting month for copper trading.

Radhika Ojha, the senior editor at Davis Index covering the U.S. copper market, can be reached at radhika.ojha@ davisindex.com. Rohan Taneja, a copper analyst at Davis Index covering the Asia and EU copper markets, can be reached at rohan.taneja@davisindex.com.