Hide & Seek

The copper market is subject to factors that have greatly influenced many of the base metals over the past several quarters. While prices haven’t been showing noticeable improvements, markets are tight, and demand is growing.

While copper is used in a multitude of end markets, six segments constitute the bulk of the ends market in North America: building wire, power utilities, plumbing, telecommunications, automobiles and refrigeration and air conditioning tubing.

While these sectors are starting to show some modest improvement in demand, the real growth, both at the present and in the future, appears to be outside North America. In fact, over the past several quarters demand for scrap copper to China has been significant.

CUSTOMER OR COMPETITOR? While the orders from China have generated greater demand for the material, for many domestic scrap copper processors, the demand from China is a two-edged sword.

Although China is helping push the overall demand for copper upward, which is a positive for many shippers, some processors are seeing material that would otherwise go to their facilities for processing being shipped un-processed directly to China.

Toby Shine of Shine Brothers Inc., an Iowa-based wire chopper and scrap processor, says that China continues to be a growing presence in the copper market. For wire choppers operating in the U.S., Shine says, China is the biggest factor. "Anyone who says anything else is a liar."

Several handlers of copper scrap say that China is taking in more scrap, including wire, with only a minimal amount of processing taking place. This trend is creating a tough competitive climate.

Don Lewon, president of Utah Metal Works, another wire chopper based in Salt Lake City, Utah, agrees with Shine. "It (copper) is a very difficult business right now. Exports are tough, and we can’t supply enough."

Magnifying the problem for many scrap processors has been the decline in supply. Lewon says that the supply of scrap copper is not bountiful. A key reason has been the slumping economy, which is curtailing the available supply from industrial plants and building contractors.

Lewon also agrees with Shine that greater efficiencies are needed to remain competitive in a market where external pressures from China are making it more difficult to operate. Steps his company is taking include reducing its electrical usage and purchasing new equipment to improve the efficiencies of processing costs.

Although becoming more efficient to be competitive is one tactic, there is only so much efficiency to be wrung out of an existing operation. Several scrap copper handlers say that it is becoming very difficult to squeeze more savings from their operations. Some domestic consumers of scrap copper are having to increase the prices they pay for the material while still finding it difficult to pass along any increase to the final consumer.

The result is an unenviable situation for domestic copper processors. Already a number of secondary copper smelters have closed due to the difficult economy and challenging environmental regulations. Copper industry analysts note that the remaining domestic copper consumers are at a big disadvantage when competing for material with Asian countries that do not have the stringent environmental regulations mandated in the U.S.

STILL ROLLING. The growing role of China in the copper market is coming while supplies of copper, whether primary or secondary, have slowed. According to a report by the China Nonferrous Metals News, Chinese companies are continuing to build up reserves of copper and other minerals smelted to produce nonferrous metals, invest in overseas copper mines and reduce taxes on the sale of the materials to help ease shortages.

John Chen, president of Tung Tai Group, a Burlingame, Calif.-based scrap metal broker and exporter, says that as dominant as the Chinese market was last year, it should grow even more this year. Chen expects to see the shipment of scrap copper to China grow by as much as 20 percent this year from last year’s export totals. Meanwhile, Chen says that many domestic copper companies are worried that they are not able to get enough scrap copper to feed their own needs.

The strong increase in shipments of scrap copper to China will likely push prices up this year. Chen feels that prices for scrap copper will rise sharply this year.

China’s mineral shortage and rising demand for nonferrous metals may harm economic growth, the China Nonferrous Metals News report indicates, citing Kang Yi, chairman of the China Nonferrous Metals Industry Association. The government should help domestic companies band together to buy equity stakes in overseas mineral reserves, the report says.

The report also advocates government easing of foreign currency restrictions on domestic metal producers so they can buy minerals more easily and allowing domestic companies to sell shares, plus lowering taxes on minerals to help the industry.

Jiangxi Copper Co., China’s second-largest copper producer, says it may buy most of its main raw material overseas for the first time to boost output. This approach may further intensify purchases of scrap copper from the U.S.

Taking a look at the overall world market for copper, Ronald McGrainor, a writer with Metal News & Views, Cleveland, sees an upbeat outlook moving forward. While there is significant tightness in the market at the present time due to strong buying by China, he points to other regions of central Asia that will likely play a key role in the future development of the copper market.

While other regions are expected to play a significant role in the copper market, China will continue to dominate the news. Highlighting the role China has played in the copper market, McGrainor says that last year "almost all countries in the world had negative copper consumption except China. They consumed so much copper that the world copper consumption actually increased."

As to the short-term outlook for copper pricing, McGrainor feels that while the first half will be "in the doldrums," the second half of the year and going forward for the next several years should be much better.

THE USUAL SUSPECTS. Holding back markets for copper (as well as a significant amount of the overall economy) is the uncertainty over the crises in the Middle East and North Korea. With the uncertainty in the market, the buying and selling of copper will remain muted.

While China continues to receive most of the press in regards to the copper market, the domestic copper market has been, to put it mildly, in a slump. A host of copper secondary smelters in the U.S. have closed over the past several years. This has not necessarily eased the pressure on the domestic plants still running.

While there has been some pressure on domestic scrap copper handlers, the spreads have been fairly consistent as of late, according to Whitney Ferer with Aaron Ferer & Sons Inc, Omaha, Neb.

Additionally, wire manufacturers, who have been struggling with slow markets, are feeling even greater pressure. Along with the difficult position of trying to run their operations, they are seeing the pressure of having to pay more for the scrap copper when it is becoming even more difficult to push through higher prices for their finished product.

Ferer notes that along with the drying up of supplies, premiums for copper have narrowed. "No one can breathe any more." With countries such as China willing to pay higher prices for copper in an almost unprocessed form, it is becoming even more difficult for many scrap processors to prepare copper and remain competitive.

What has happened, Ferer notes, is that many copper smelters in the U.S. have closed. Meanwhile, freight rates to ship copper to China are declining, allowing for handlers of scrap copper to ship to coastal regions from anywhere in the U.S. Joel Fogel, with Cohen Brothers, a Middletown, Ohio-based scrap recycler, agrees that the trend is definitely toward offshore shipments.

What is happening now is that with such a strong demand for the material from off shore, copper is moving with only minimal processing.

Tung Tai’s Chen agrees, saying that China’s strong demand for scrap copper is resulting in more material being shipped overseas without the processing typically needed to clean up the material.

While there is some domestic buying, the number of secondary copper consumers on the domestic side is shrinking.

Over the past several years a number of the secondary copper smelters have shut down. The biggest problem is the steep environmental regulatory climate required to operate in the U.S., which makes it extremely difficult to run profitably when competing against less regulated overseas plants.

With these costly regulations not in place or not strictly enforced in China and other developing countries such as India and Pakistan, this puts U.S. smelters, refiners and brass mills at a competitive disadvantage.

ON THE HORIZON. All things considered, scrap copper markets are holding up surprisingly well. The upward pricing trend in the short term is expected to be muted, although stronger than expected demand over the second half of the year and over the next several years could help drive scrap copper markets.

Several questions that many copper handlers are dealing with now include the possibility of additional copper capacity. Primary copper production is a wild card at the present time.

Over the past several years, Russian copper production has been drastically curtailed by a host of factors. However, if smelting operators in Russia and other nations begin producing greater amounts of copper, the market will loosen, freeing up domestic markets for scrap copper.

McGrainor says the former Soviet Union was a large copper producer. However, over the past several years Russian production has steadily declined, from around 1.2 million tons produced several years ago to around 200,000 tons last year.

Should production from former Soviet republics get back on track, this would change the supply factor in the supply and demand equation.

While China shows some strength, McGrainor feels that copper markets will remain somewhat listless during the first half of this year. However, the second half of this year should see some improving fundamentals, while next year the trend is even better.

Like other basis materials, scrap copper is finding a ready home in China (as well as other Asian countries). As the North American economy slowly climbs out of its manufacturing doldrums, the push by China to modernize itself is resulting in steadily growing demands for copper.