Copper Markets Get Hit Hard

In China, the current year is the Year of the Rabbit. The Rabbit is one of the luckiest of Chinese symbols and indicates prosperity and good fortune for businesses. The way things look in the copper market, those rabbits are going to have to start producing foundries, not fortune, if things in the scrap markets are going to show any hope of improvement.

In fact, given its recent track record with luck, any rabbit the copper industry would find would most likely be on a skewer.

Not everyone is as pessimistic as Irwin Karnick, director of UFM International, New York, who says the only bright spot he sees in the copper markets is the possibility that “we may all die before this gets any better.” But most other observers would agree with him when he says he sees almost no chance at all of the market returning to the highly profitable price ranges of two or three years ago.

If there is a single goat where most people place the blame it is an oversupply of material. The market is dragging because there is way too much copper available for sale. There are more major industrial nations producing material. “There simply is a lot of material around from a lot of people,” Karnick says. Comex and LME (London Metals Exchange) stocks are through the roof and still climbing.

The result this winter was a frigid market, both in terms of price and weather. Indeed, there are those who saw the cold snaps through the winter months on the High Plains and up the Northeastern corridor as a blessing in disguise. Traditionally, the scrap market slows as the weather turns bitter across the West, Midwest and Northeast. Cold weather discourages people from going out to collect material, whether it is copper, aluminum cans, or car batteries. The pattern held this winter as supplies of scrap copper drifted even lower than usual during the cold periods.

While it is unusual for a scrap dealer to welcome any change which cuts the flow of scrap, in this case they at least could take solace in knowing that there was a bit less supply pushing down on the market. Several commodity market watchers say that things are so lackluster that speculators are all but gone from the market. In ordinary times, this might be seen as a good thing, too. However, it has depressed market activity. Through the early months of 1999, physical trade in actual material was about the only movement in copper.

In addition, with markets as weak as they have been recently, there is not much incentive for people to look hard for recyclable material. Spreads are not attractive. Base prices are not attractive. Why mess with copper when there might be more money made elsewhere?

Prospects for improvement are dim, says Fred D’Agostino, senior vice president of Integrated Metal Resources Inc., Macedonia, Ohio. He says he feels players in the market have been spoiled by a run of good years. “This is a commodity business. Traditionally, it’s been five terrible years followed by one or two good years. Recently, we had five good years and we got spoiled. But that’s the nature of the business,” he says.

A look at other commodities only underscores his point. The price of oil, as reflected at the gas pump, has not been this low since Gerald Ford was president. Agricultural commodities—from grain prices to pork bellies—are in a major trough across the board. Most other industrial metals, like copper, are suffering from price slumps.

Whose ox is being gored depends on the dealer’s business arrangement. Most major industrial consumers will have a fair time of it because the larger dealers are locked in to long-term contracts. It is the smaller dealers who will be hurt worse since they will continue to see less material from the peddlers. Comex prices are poor, and the local dealer has to pay 20 to 30 cents under Comex to cover his operating costs, so the retail scrap quote is hardly worth getting out of bed to hear.

Things are steady, but volumes are low says Enam Noor, a copper and brass buyer with Chemetco, Harvey, Ill. “Prices are low with a 12-year low in the market level,” he notes. Even a slight increase in prices might not be enough to bring out the scrap, he indicates.

“While 70 cents is higher than 63 cents, the question is whether 70 cents is good enough,” Noor says. Even should the market nudge 70 cents on a short-term blip, he sees little chance of it going to the mid-70s any time soon.

“We’re still busy, but in terms of the market, there is no sign of improvement,” says Larry Mallin of Mallin Bros. Co. Inc., Kansas City, Mo. Their operation chops a lot of copper wire (see Recycling Today, July 1998) and material continues to come in. One reason they are remaining committed to the copper market is that the scrap iron business is so poor, he says.

THIRD QUARTER HOPES

While the “red metal” has not been producing big profits for recyclers lately, there are those who see at least a glimmer of possible hope for the market sometime in the third quarter. Michael W. Lockman, president of Scanrec Inc., Waco, Texas, says he looks for improvement in the late summer for two reasons. First of all, he expects there should be some improvement in the general economy by then.

Secondly, and perhaps more importantly, he hopes that the government will take some meaningful action in light of the dumping charges which are being leveled by many in the steel business. That might curtail the flow of material in other areas as well, and the start of the healing process could begin to take effect.

Not everyone is as optimistic. “I think we’re heading into a recession,” Karnick says, looking toward the end of the year. He says that, barring a major cataclysm in the environment or something else occurring to wipe out communication or transportation networks, he does not see any hope for recovery in the copper markets for at least three years.

Historically, really bad news has been good for copper prices. Copper prices jumped when Britain and Argentina got into a shooting war over the Falklands. They went up when the Pope got ill, when President Reagan was shot, and when a key bridge near mining regions got blown up in Zambia. Nobody wants to wish ill on any individual or foreign state. But everyone wants to see something that will help the current situation.

It may be that a continuation of the lower prices could be the start of an answer to the problem. Jerry N. Goldblatt, non-ferrous manager at Hagersville Recycling, Hagersville, Ontario, Canada, says he might actually see a silver lining in a lower market price. Should prices get much lower, he would expect to see cutbacks at the mills. “And that may be a good thing,” he says. While cautioning that he is not an expert, he notes that—although lower prices would do nothing in the short term to drive the scrap market—they might encourage primary producers to re-examine their production levels. A cutback in primary production should be bullish for copper scrap prices. At the very least, it might stop the downward drift.

“There is not a lot of scrap coming out,” he says. While he does not think there is a lot of hoarding, he does feel people have “magic numbers” at which they will sell. There is little hope that any but the most bearish of magic numbers will be met in the near future.

“We are awash in refined copper and you can’t buy scrap,” D’Agostino says. He says the market may be so dislocated that—in some limited areas—the price of scrap might actually go above the price for cathode. Some producers are not set up to handle a 36x36 full-plate cathode. It would cost them more to cut it down than it would cost to buy scrap of the right size, he notes.

“It wouldn’t surprise me to see the market for scrap higher than cathode for a short time,” he says. He adds that the market will correct itself, but the possibility may exist.

DECLINING MARKETS

Too much new copper is being mined, as far as recyclers are concerned. Primary producers in countries like Chile and Peru might take issue with that view, given local economic conditions and the need to generate cash. But both sides of the market have to be intimidated by the specter of many of the end markets for copper becoming stagnant or even facing decline.

“The mines certainly are creating a glut in the market,” Mallin says. “It’s the same as in the aluminum market. Production has to back off.”

He has seen some signs of improvement in the demand from Asia. “The domestic market is tough,” he says, but he notes that they have seen some activity in the export arena. Korea, China and Taiwan have been in the market, but have not been buying enough to take up what is coming out of the mines. The overwhelming pile of stocks is bearing down on the market. Yet primary production continues along at levels that might be better associated with rabbits than mines.

All of those computer users on the Internet aren’t helping things, either. By early 1998, the U.S. Commerce Department estimated the number of people accessing the Internet at over 100 million. The existing copper wire infrastructure is unable to handle the sheer amount of traffic being run over the installed network. Fiber offers huge bandwidth at reasonable cost, so the phone companies are turning to glass fiber, not copper, as they expand their network footprint and increase the bandwidth carrying capacity.

A second market force favoring fiber over copper is quality. Optical signals tend to be less interference prone than electrical signals and deliver a more pure information payload at the speed of light. Remember the Sprint “pin-drop” test? For once, an ad was based in reality. But that reality is a sad one for the copper market.

As a result, phone companies, Internet service providers (ISPs), and their competitors are rushing to install fiber—not copper—in their backbone networks. The general press is full of reports of the demise of copper telephone wiring in favor of fiber-optic cable. With the growth of the Internet, demand for fast broadband networks is at an all-time high. Unfortunately, few telephone company executives are interested in snaking copper through their conduits to meet the demand. Fiber is seen by the ISPs and telecommunications firms as a higher quality transmission medium and the phone companies are wiring their networks with fiber optics.

SURVIVAL TACTICS

In the meantime, some operators are boring down on quality to make up for poor prices. Lockman says he sees a number of producers doing whatever they can to upgrade the value of their scrap. His company represents a Scandinavian line of wire choppers and briquetters.

He says recyclers in the copper scrap processing segment can make as much as 20 percent more by briquetting the copper versus moving it as turnings. By melting their own copper, they are able to add value to the product and squeeze a bit more profit out of the operation.

“Quality is what keeps you in business,” says Mallin. “You just have to put out more units at a lower cost so you can make a decent profit.” While there is tightness in the bare bright copper chop market, quality material still is in demand.

He also recommends taking a long view of the market. Noting that they have been in business for 71 years, he adds that they plan on being around for another 71 years. But, he says, it sure would help if the primary production were lower.

Most scrap dealers agree that the answer probably rests with some development in the market that forces mines to reduce their output. “At these levels, what is critical is the action the mines take. If they shut down or cut production, we might see 80 cents,” says Noor. “If not, we’re stuck in the low to mid-60s for some time.”

D’Agostino says that the current gloom might become a self-fulfilling prophecy. “Any rally will be short-lived and sold into,” he says.

“I think we’re probably going to be in the area between the high 50s and the high 60s for the rest of the year,” Mallin concludes.

Given today’s market realities, that is not a particularly pessimistic assessment of the market for the rest of the calendar year. Maybe come the Chinese year of the rooster the markets will have something to crow about. 

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

Copper Five Years Ago

“Commodities experts admit to being caught by surprise by copper’s sudden surge on COMEX.”

Unfortunately, that’s not a late-breaking item from the wire service. Rather, that was the lead sentence of the Recycling Today Commodity Focus on Copper found in the October, 1994 issue of RT.

Volatility was the key word at the time, with copper prices bouncing from a range of 87.13 cents per pound to heights of $1.16 per pound in the first nine months of 1994. “Even copper experts have been caught off-guard by the metal’s dramatic upward movement and the fact that prices have held at those levels,” Michael Friedman, president of Friedman Metals, York, Pa., told RT at the time.

Five years later, many copper scrap dealers would love nothing more than to be caught off-guard by a dramatic upward price movement.

Why was pricing so strong at the time? Speculators were blamed by some in the industry, but the supply and demand equation was certainly much different compared to today’s.

“Copper has been flowing into the U.S. from abroad to meet domestic demand, and stocks are down worldwide, almost to a critically low level,” Dan Edelstein, then with the U.S. Bureau of Mines (now part of the USGS) told RT in 1994. “Tight supply is driving up the price,” he added.

As detailed in this month’s feature, that low global inventory situation has disappeared, as copper mining companies spent much of the last five years opening new mines and reopening shuttered ones to  supply the world’s copper-consuming manufacturers. -- Brian Taylor