Finding the floor

“Volatile” is perhaps the best word to describe copper pricing on the terminal markets from mid-March through the start of June, with May having been the most challenging month.

Recyclers can benefit from higher profit margins when exchange-traded copper prices increase, but they also face higher margin calls when hedging and greater exposure to price volatility. Recently, with prices on the COMEX diverging considerably in May from those on the London Metal Exchange (LME) and Shanghai Futures Exchange (SHFE), it has been challenging to price loads of the recovered metal.

There are some recovered copper traders who believe the red metal has found a new floor price on the COMEX coming out of May’s activity.

“I think the market now will trade with a floor of $4.25 and trade between $4.25 and $5.25 for the foreseeable future,” says Bernard Schilberg of recycling firm Prime Materials Recovery (PMR) Inc., headquartered in East Hartford, Connecticut, and Ames Copper Group, Shelby, North Carolina, which produces recycled copper anode.

One analyst says a number of factors combined with fund buying led to the May “price explosion.”

Speculator driven

Edward Meir of London-based Marex attributed the metal’s rapid rise and subsequent decline in value to the actions of speculators.

“I don’t pretend to know anything different or better than you given what these markets have been going through over the last couple weeks,” he said during the Bureau of International Recycling World Recycling Convention and Exhibition in late May in Copenhagen.

He attributed the price increases on the terminal markets for copper to a combination of bullish factors, including mine-related issues suppressing copper production; investor sentiment that purchasing managers’ indices were improving and central banks would lower bank-to-bank lending rates (which happened in Canada and the European Union but not in the U.S.); and growing demand for copper for use in electric vehicles (EV), power transmission and data centers, which he referred to as the “artificial intelligence (AI) sector.”

The latter is particularly true of China, Meir said, where demand from these sectors nearly has made up for the collapse of the country’s property market, which once accounted for 20 percent, or roughly 5 million tons, of copper demand.

“This month, a squeeze in the U.S. CME [Chicago Mercantile Exchange] contract led to even more fund buying before a correction set in this past week,” he said of the week of trading ending May 24.

Schilberg says “exogenous” variables pushed the COMEX copper market into the arbitrage situation relative to the LME when some interests traded too much volume on the exchange and were caught short on stocks available for delivery, getting squeezed.

“That’s what made the market so volatile, and that’s what made the market go into major backwardation, which means the spot market was much greater than the futures market,” he says. “They had to buy back the short positions, and that made the market artificially appreciate to over $5 [per pound].”

In his presentation at the BIR event, Meir noted that funds account for more than 60 percent of client volumes on the exchange as of 2015, making trading and hedging of physical copper difficult.

In “The Copper Journal” dated June 7, John Gross of J.E. Gross & Co. Inc., based in Huntington, New York, writes: “The past several weeks demonstrate just how fragile and skittish our markets are, with speculative traders in the driver’s seat, pushing some markets sharply higher, only to see them fall off the cliff at the hairpin curve. We hesitate to call this past Friday ‘Black Friday,’ but it was, at minimum, a ‘Very Dark Gray Friday.’”

Gross notes spot copper on COMEX fell 20 cents June 7 to settle at $4.49, pointing to a jobs report that exceeded expectations, prompting the dollar and interest rates to increase, for the sell-off. “This is just one more example of ‘Good News Becoming Bad News,’” he adds.

Michael Diehl, a California-based senior vice president at New York-based Coremet Trading Inc., also blames speculators for copper’s dramatic upward price trend in May. However, he says, the base case that copper will be undersupplied in light of demand from electrification and other aspects of a green energy transition and growth in the computing sector creates a physical position by which the price should be increasing, but not at the speed we’ve seen.

Copper in shortage?

Not everyone agrees a copper shortage is looming, however.

In “The Copper Journal” May monthly report, issued June 5, Gross writes: “Just about every day, we are led to believe the world will not have enough copper in the years to come due to rapidly rising demand and/or falling supplies. We don’t agree. We know this sounds like blasphemy and will not be taken kindly by many people, and we may be excommunicated by the industry, but ‘ya gotta call it the way ya see it.’

“If the copper necessary to make a particular item isn’t available, the item will not be made. Alternatively, if the item can be made from a different metal or material, then substitution will take care of things.”

Gross also notes that while the Cobre Panama mine is not operating, resulting in a loss of 65,000 metric tons of copper during the first quarter of this year relative to the same period last year, that loss has been more than offset by a 136,000 metric ton gain in mine production from the Democratic Republic of Congo.

The International Copper Study Group (ICSG), based in Lisbon, does not foresee a world refined copper shortage arising next year, though it does anticipate the surplus shrinking. In its “Copper Market Forecast 2024/2025,” issued in April, ICSG reports world refined copper balance projections indicate a 162,000 metric ton surplus for 2024 and a 94,000 metric ton surplus for 2025.

According to ICSG, world refined copper production is expected to rise by about 2.8 percent this year and by 2.2 percent in 2025 as output recovers from a series of maintenance outages, accidents and operational issues that occurred last year in Chile, Japan, India, Indonesia and the U.S. The organization forecasts that secondary refined production using recovered copper will grow by 6 percent with expanded production capacity this year.

Growth in secondary production could result in insufficient volumes of recovered copper being available longer term, according to an executive with a large multilocation scrap processing company headquartered in the Midwest.

“Right now, there doesn’t seem to be a copper scrap shortage,” he says, though scrap supply does seem somewhat tight. “In the short term, we’re just buying and selling; we’re trying to make sure that we secure all the units we can.

“In the long run, owning scrap units is going to be key,” he continues, adding that his company is looking for opportunities to be able to control more copper scrap in the future.

“In the short term, there’s not a shortage of copper,” Schilberg adds, whether secondary metal or refined metal. But he sees that changing in response to electrification and the growth of data centers. “I believe that copper will be in a deficit in 2024 and the supplies will further erode in ‘26 and beyond. I’m very bullish on the fundamentals of copper.”

Present and future

The higher terminal market values for copper did not appear to bring more scrap to market in recent months. At the BIR event, Meir said this illustrates how tight the markets are across their supply chains.

Diehl cites muted manufacturing and construction activity as factors, saying, “Projects dependent on interest rates have not really gotten going.”

However, with the consensus being that interest rate hikes have stopped even if the Federal Reserve has not implemented rate cuts, he says this could be enough incentive for some projects in the construction and manufacturing sectors to move forward, leading to more scrap generation starting in the fourth quarter.

While Diehl says copper markets have normalized from where they were in May, they remain dynamic. “It’s not business as usual, but it will be more normalized as summer goes on,” he says.

During the May run-up in value on the terminal markets, the scrap processing company executive adds that demand outpaced scrap supply, with consumers and processors looking for material.

Schilberg characterizes supply and demand as of mid-June as being in equilibrium. “Some grades have greater supply than others, but the majority of the copper that is available is being consumed,” he says. “I would say it’s a pretty good supply-demand equation at this time.”

Spreads for recovered copper relative to the metal’s value on COMEX widened out during the May run-up, the scrap company executive says, “but they haven’t really narrowed back down to where they were before the run-up. So, everything spreadwise [relative to] the COMEX is wider than it was in the beginning of May.”

Diehl adds that spreads as of mid-June are not that far off historical trends, however. He also notes that with the May run-up in pricing on COMEX, saying, “The amount of money you have to have to keep your hedge book intact is exceptional.”

“Higher copper prices are both a curse and a blessing,“ Schilberg says. “From a negative standpoint, when you have higher prices, you have to spend more time with your risk/loss management team from a hedging standpoint, just to be sure that you’re in a perfectly hedged position because the negative variances could be overwhelming.”

He also points to higher carrying costs and greater credit exposure as downsides of rising prices.

“On the positive side, normally, when copper prices go up, there’s more availability of scrap,” though he says scrap is no longer hoarded as it was two or three decades ago, so this tends not to be the case today. Industrial production also generally increases, though that also did not occur in the recent market.

Scrap recyclers’ margins also tend to increase. “When copper prices go up, the discount, the differential between the commodity exchange and the inherent physical copper [price] grows, and that literally is the scrap recycler’s gross profit margin,” Schilberg says.

The scrap processing company executive says domestic demand for recovered copper is good as of mid-June. “Some of the consumers of No. 1 copper, or one major consumer, bought their July fairly quickly and fairly early, so, to my knowledge, they’re still out of the market,” he says. “Others are still in the market. But long term, I think demand looks good.”

Regarding export demand, which for his company is largely from Asia and involves trading primarily No. 2 copper and insulated copper wire, he says, “They continue to want to buy material. The economy in China, from what you read and what we hear on the ground, is no good, so that’s concerning. But it’s been no good for years, and their demand for copper still seems to be good.”

Chinese copper scrap consumers were hurt by the run-up in the arbitrage between the COMEX and SHFE, “so that caused some issues,” he continues. “But if we could agree on a spread, they would buy material.”

Ames Copper benefitted from the lack of export interest in May. “In fact, we got to a point for a two-, three-week period, we were importing scrap to the United States,” Schilberg says.

The Midwest-based executive questions whether China’s copper scrap demand will continue considering the state of its economy, but says Japan continues to buy material.

Diehl sees domestic demand as somewhat muted heading into the summer as the markets emerge from the excitement of May, describing it as “ho-hum.”

Domestic consumers had the upper hand in May, he says, with the COMEX being the highest-value market and the arbitrage that existed relative to the LME and SHFE.

The Midwest-based executive says if the COMEX futures pricing stays around the $4.48 per pound recorded in mid-June, he doesn’t see spreads widening further. He thinks the flow of copper into scrap yards is going to drop somewhat because of the current pricing for the metal.

“[Some] dealers tend to be a little bit speculative in nature,” the executive continues. “If they missed the market [run-up], they’re less likely to sell now; they’re going to wait maybe to get back to $5. I’m not sure if that is a good or a bad idea, but that’s what people do. So, I think volumes will come off just a little bit, and, if anything, spreads might narrow closer to where they were before all of this happened.”

The author is editorial director of Recycling Today Media Group and can be reached at dtoto@gie.net.