Copper Markets Show Surprising Strength

Copper markets are looking as bright as a shinny new penny. The outlook for copper scrap is much stronger than it has been in past years, too, as the industry starts to make sense out of what had been a topsy-turvy market.

Prices floated between $1.24 and $1.45 through much of 1995, with late summer Comex markets hanging in the $1.36 to $1.38 range – quite healthy given the red metal’s recent history.

"The market looks pretty good," says Bob Stein, manager of the nonferrous division of Louis Padnos Iron & Metal Co., Holland, Mich. "Supply and demand are fairly well balanced. Those in the brass business will tell you scrap is tight. Red brass – items like radiators – are high in price. There is real tightness in certain sectors."

"The copper market is essentially a fundamental market, driven by supply and demand over the longer term," says Mike Ashworth, manager of metals procurement for Southwire Co.’s copper division in Carrollton, Ga. The company consumes significant quantities of copper scrap. "However, in the short view, it can be easily influenced by the funds because it is a small market.

"Today, demand throughout the world is very good," he continues. "The U.S. market is very strong. European economies are strong and getting stronger. Japan is not back to its level of strength, but is improving. On the demand side, copper looks robust. On the supply side, (in late summer) prices are an indication of the relative tightness of supply."

There is strong global competition for copper scrap, according to Daniel Schwab, executive vice president of Franklin Smelting & Refining Corp., Philadelphia, another large consumer of copper scrap, especially refinery brass. "There are a lot of players, both in the U.S. and abroad, looking to buy the same pound of material," says Schwab. "I think it’s a global economy for copper. Business here in the United States is still relatively good. It’s good in Europe, and it’s good in China."

Marc Schupan, president of Schupan & Sons, Inc., Kalamazoo, Mich, agrees that the market is solid. "We’ve seen strong pricing from the consumers based on Comex and LME (London Metals Exchange)," he says. "Prices are higher than we expected six months ago."

While specializing in aluminum, he says there is a strong demand for No. 2 copper, but it takes longer to move No. 1. Most of Schupan’s copper is insulated wire, coming from manufacturers, power utilities and the RV industry. "The higher price is not going to bring out more copper," he adds. "Nobody is waiting for copper prices to go up. Our flow of copper from industry and retail has been strong."

Stein says he sees No. 1 copper fairly well balanced, but No. 2 copper somewhat short in supply. This he credits, in part, to a large export market to the Far East. Similar demand trends from Asia have been noted in the plastics, titanium and aluminum markets. "They are for real there, and they need material," Stein says.

Bernie Schilberg, executive vice president of Schilberg Integrated Metals, Willimantic, Conn., was cheered when the German Bundesbank cut its prime lending rate. "That will generate activity," he says. He remains bullish on the domestic scrap market and agrees that China will be continue to be good buyers of No. 2 and insulated wire.

Schilberg says he expects the scrap differentials to tighten over the next four to six months, even if the LME or Comex stay high. While agreeing that the current 22 cent spread is well above traditional spreads of 15 cents to 20 cents, he points out that prices of copper are well above the traditional trading zone of $1.10 to $1.20.

Given the market conditions into early fall, Stein would have expected the spreads in the copper market to widen. But they stubbornly refuse to do so as copper does not come into the market. Some of the slowdown can be attributed to dealers closing shop for the summer, a tradition with some smaller scrap yards.

Michael Friedman, president of Friedman Metals Brokerage Co., York, Pa., says the primary and secondary smelters are making a "bundle of money" right now. "If they’re not, they’d better be looking at how they are doing things," he says. "Spreads that domestic consumers are working on for No. 2 copper are a good 50 percent above what they usually are. The consumers are not fighting for it the way they used to," he adds.

Indeed, although the normal spread for No. 2 is in the 13 cents to 15 cents range, early spreads for No. 2 were running between 22 cents and 24 cents. Friedman says he does not think that any increase in demand for housing or autos will close the spread, adding that he’d rather be doing business with companies whose profit margins keep them well back from the verge of bankruptcy.

"If anything, we have the opportunity to see those spreads move wider," says Ashworth. "The only real influences on that are offshore buyers of scrap. If the Chinese come in and buy heavily, that will widen the spread."

Some people also are devoting a lot of time and energy to the scrap iron business which has skyrocketed this summer. The prevailing attitude is to make money while the iron business is booming. Since copper is strong, and quite liquid compared to iron, observers expect smaller firms to take a flier on copper and hold back.

"There’s an old saying that you can never go wrong turning a profit," Schupan notes. "Most of us in this industry are not speculators. You have to ask yourself how much higher prices can go. Then look at the downside potential. What is the potential for making another nickel?" he asks. "People in the know will lock in their profits and continue to move things."

At W. Silver Recycling, Inc., El Paso, Texas, the copper chopping facility sees a steady flow of material year-round. They deal mainly in insulated wire, purchasing from dealers, industry and the peddler trade. The operation draws from a broad geography, including California, Colorado, New Mexico and Arizona. "Copper continues to flow. We don’t see the cycles here," says Ben Galanter, WSR manager. "Supply is steady."

Likewise, he finds demand is strong. "It’s always there. We sell all we can buy," he says. Among the strongest markets for WSR is the export business to the Far East. Shipments go out through the port of Los Angeles. Galanter declines to predict whether the market will maintain its even keel. "I never predict past this afternoon," he quips.

However, Friedman is fairly optimistic about international copper markets. "The Chinese are beating on doors for copper," he says. "India is becoming more aggressive. If freight rates would drop some there would be much more business moving East." While there are reports of some dealers having 50 containers of scrap just sitting, looking for a market, he says many consumers are fighting for material. "A lot of people are looking to the Chinese as an indicator of what copper will do," he says. He predicts that the Chinese will continue to be aggressive, although there will be adjustments. "China is working 24 hours a day and building like gangbusters."

Calling Russia "a strange enigma," he says that many U.S. dealers are avoiding direct dealings with the CIS, preferring to work through German or Polish buyers. In addition, he sees little indication that Russia will be expanding or rebuilding the way China is.

There are serious concerns about Russian cathode quality, too. Even internal consumers report suspect quality in their rod furnace operations.

Ashworth feels the markets already have seen most of the influence they’ll see from the CIS. "Most of the metal was scrap and poor-quality cathode," he observes. "Most of it has already come out of the CIS and there is not much left. People were moving metal out to get hard currency." Noting that the central government is trying to tighten the reins on shipments, he adds that the poorer quality of cathode was reflected in its price.

Earlier in the year, there was shortness in the U.S. domestic supply column. And, despite the continuing supply deficit, spring copper prices declined, notes Daniel Edelstein, copper commodity specialist with the U.S. Bureau of Mines. The Comex price averaged $1.28 during the last week in April 1995, down 13 cents per pound from the last week in March. Prices remained lower throughout the first three weeks of May before again rising in response to continuing tight supplies.

At the end of April, Phelps Dodge Corp. became the last major domestic producer to abandon its "producer" price and move strictly to a Comex-based pricing system, Edelstein notes.

By the third week in June, the Comex price nudged over $1.45 per pound – the highest level in more than five years. All of this was coming out of 1994, which saw copper consumption at a record level, up 30 percent from the depressed 1991 levels.

"Copper just doesn’t seem to want to go down," says Donald Lewon, president and CEO of Utah Metals, Salt Lake City. "It just seems to bounce up every time it drops. My gut-level feeling was that it would go down this summer, but it stayed amazingly strong." He credits the strong copper market with helping hold up the aluminum prices. "Aluminum spreads are narrowing, making it difficult to keep the margins," he notes. "That says there are more than adequate supplies of aluminum around."

Copper started to make its great strides to new heights as the economy recovered in the second half of 1992: by 1993, copper consumption was up by 10 percent over the previous year. Last year, consumption for the first six months was up by 17 percent over the previous year and up by 13 percent over the second half of 1993.

Early this year, consumption was strong, but it slackened some in March and April. Weak leading indicators for the copper industry heralded the decline. Auto sales fell 8.8 percent in April. Fewer construction contracts were awarded for commercial and industrial facilities. Fewer housing permits were issued for construction of homes. But in the second half, those figures are reversing themselves.

U.S. mine production, which has been stable over the past two years has been increasing with the startup of Morenci’s Southside extension and Great Lakes Minerals’ 543-s deposit, Edelstein says. Small increases are expected from ASARCO Inc.’s Ray Mine and new underground mine at Mission; and Arimetco’s Yerington and Van Dyke mines. ASARCO settled with its unions on a three-year contract that increased the average wage $1.30 per hour over the life of the contract.

Arimetco announced plans to begin dewatering of the Yerington pit earlier this year. Startup of Magma’s Robinson project in 1996 is expected to further add to capacity and overshadow reductions in solvent extraction-electrowinning production (SX-EW) at its San Manuel open pit.

Total domestic mine production of copper, Edelstein predicts, is projected to reach 1.9 million tons in 1996.

"Until mine operations bring more copper on stream we’ll have a tight situation," Franklin’s Schwab says. "I don’t see that happening in any meaningful way until mid- or late-1996."

The surprise this year comes in the form of an increase in total scrap recovery between January and May 1995 over 1994 levels, even though 1994 was a weak year for scrap. "Total scrap recovery is slightly ahead of last year," Edelstein says. "Although recovery from old scrap is down, consumption of new scrap is up." Brass mill scrap consumption is the main reason for the change, he says. Distribution could account for some of that difference. Estimates for foundry use are even.

Imports of all copper and copper alloy semifabricated products, through May, 1995 totaled 117,000 tons. That is up from 85,000 tons during the same period in 1994, according to the Copper and Brass Fabricators Council.

Refinery production, which declined slightly in 1994, should increase in the second half of 1995 with the commissioning of the new Kennecott smelter which will feed the refurbished refinery, and increased SX-EW production from Phelps Dodge.

"Production will increase significantly in 1996 as these facilities come up to capacity," Edelstein says. He adds that there will be a small off-setting loss from reduced SX-EW production at San Manuel, and the closing of Southwire's Gaston Copper Recycling Facility, Gaston, S.C.

Overall, Edelstein says refinery production is likely to increase by more than 150,000 tons in 1996 from the 1994 level.

"However," he notes, "despite recent declines in leading indicators, indices for contracts for new plant orders and industrial equipment and machinery remained well above first-quarter 1994 levels, and GNP (gross national product) is projected to increase. Although the dramatic growth in copper demand experienced over the past three years is not expected to continue, consumption is projected to remain near 1994 levels through at least 1995."

Schupan has his doubts about the demand-side of the equation. "I’m not sure demand is going to be fantastic," he says.

But Utah Metals’ Lewon feels differently. "There is demand here domestically and demand in world markets. As we go through hiccups in the economy in the near future, I think we’ll see $1.30 again. But every time it headed down to $1.20 (such as in May), the market bounced right back up.

"It’s a real confusing market," he admits. "I just don’t see it going over $1.50 a pound. We’re trying to keep a balanced inventory, hedging to maintain margins. I think that the market’s strength is due to underlying demand. People say that traditionally copper selling at over $1.40 a pound doesn’t stay there long. Maybe now the times are different."

In Philadelphia, Schwab says he expects the copper market to go even higher than the mid-$1.40 levels. "I think it will make a real run at $1.50 and has the potential to go higher," he says, noting the tightness of scrap and metal in general and again pointing out the need for finished metal overseas.

Padnos’s Stein notes that some were predicting copper will lose market share to glass fiber optic cable, but demand for copper keeps growing.

"I expect the demand for copper to stay strong," Stein says, "and I’m usually not that optimistic. I think we’ll see good domestic demand for copper scrap both here (in the United States) and in the Far East." He notes there may be some jolts in the Asian copper markets near the Chinese New Year when dealers there close out their books. Otherwise, he sees a market with the energy to maintain its recent price levels.

"There is always talk of new supplies, but we are not seeing copper coming into the market in any appreciable quantity," says Ashworth. "As a result, copper enjoys a strong price. Near-term, I don’t see any change either on the supply or demand side. The market has more up potential than down."

Friedmam agrees with that assessment. "There are many new markets for copper," he says. "There is a computer in every home and all the elementary schools have computers. They all are made with copper circuit boards. That’s a market that did not even exist 10 years ago.

"In addition, more homes are being wired for sound with copper," he says. He notes the re-building of the cable TV infrastructure, typically using copper-clad aluminum.