Out of Balance

Something is awry in the copper market. Stocks on the London Metal Exchange (LME) reached above 540,000 metric tons in early February. Yet, at the same time, prices have shot up quickly and strongly, rising nearly 30 cents per pound—better than 10 percent—since the end of 2009. While prices did taper off a bit at the end of January 2010, the market’s overall movement made little sense to most copper scrap dealers and processors.

 

“This is a recipe for disaster. I just can’t get my arms around this market,” says Scott Greenberg, vice president of Global Recycling Inc., Charlotte, N.C.

 

“The current market just doesn’t make sense,” agrees Michael Friedman, president of Sustainable Management, Louisville, Ky. “Usually copper markets move on new copper finds. There is nothing like that out there now. This is purely speculator driven,” he says.

 

Friedman says he is amazed that people are talking about recycling copper like it is something brand new. Even the recent focus on recycled metal should be a market negative, as more material enters the supply side, further tipping the balance toward lower prices.

 

“My crystal ball broke sometime earlier this year,” Greenberg says. “I choose not to roll the dice. I’d advise anyone to buy and sell the same day…especially in this market. I tell the people I’m buying scrap from, ‘If you have scrap on the ground, bank it.’”

 

TEETERING MARKET

Greenberg notes that inventories are up, but that the price of copper remains quite strong—even stronger than was predicted at a scrap roundtable event toward the end of 2009. Then, the price of copper was nearly $2.85 per pound, and the consensus, while bullish, had 2010 copper floating somewhere in the area of $3.17 per pound. By late January 2010, copper on the LME already was trading between 15 and 20 cents higher than that prediction.

 

Keith Hoelscher, a buyer with Commercial Metals Co., Corpus Christi, Texas, says the market is “crazy.”

Teck Resources Aids in Olympic Medal Effort

Teck Resources Ltd., a mining and metals production company based in Vancouver, British Columbia, Canada, has used some recycled electronic scrap to make the medals awarded at the Vancouver 2010 Winter Olympics as well as the Paralympics Winter Games. The company says it was the exclusive metals supplier for the medals awarded at the 2010 Olympic Winter Games. The company notes that this year marks the first time that medals awarded at the Olympics contained metal recovered from electronic scrap. The company provided differing amounts of gold, silver and copper sourced from its operations around the world to make the medals. For the gold, silver and bronze medals, the company incorporated varying amounts of precious metals extracted from obsolete electronics. The gold, silver and copper used in the medals were recovered and processed at Teck’s Trail, British Columbia, smelter and at Umicore facilities in Belgium. This material was then combined with metal from other sources to produce the Olympic medals. According to Teck Resources, the content of recovered metal from electronic scrap in the specific metals is: • Gold, 1.52 percent; • Silver, 0.122 percent; and • Copper, 1.11 percent.

He attributes some of the swing to the falling U.S. dollar. “The dollar’s devaluation seems to be the main thing behind this,” he says.

However, Friedman has another view. “My feeling is that it is speculators,” he says.

 

While the recent earthquake in Haiti might cause some people to see opportunity on the consumption side, as much of the cable infrastructure in Port-au-Prince, the capital of Haiti, needs to be rebuilt, in the long term, this will not generate significant demand. And, given the situation in Haiti, the expected consumption of telecommunications applications likely will lose out to state-of-the-art wireless infrastructure.

 

While many signs point to speculators as the cause behind the run-up in prices, it would not be the first time non-market forces sent a basic commodity market out of sync with supply and demand.

 

Greenberg says copper scrap is flowing well but is slightly tight in supply. The strong price of ferrous scrap has provided a real boost for copper scrap flow. When ferrous scrap prices are rising, other metals tend to follow that material to the market. After all, if a peddler has a pile of iron to move, it makes sense to clear out any copper or other lower-volume material at the same time.       

 

Greenberg says he is amazed at the scope of the daily and weekly movement of copper pricing. Swings of 10 or 15 cents per day are not unusual. “This is not gold,” Greenberg says. However, the copper market is sustaining these increasing prices.

 

Shine Bros. Corp., Spencer, Iowa, has seen steady flow of copper scrap, as well. “The COMEX price is helping out a bit,” says the company’s Chris Hart.

 

Several observers note that the amount of copper being consumed remains strong. “Maybe those inventories will not have an impact on the market,” Greenberg says of primary copper stocks at LME warehouses. But he says he is opting for the more conservative approach.

 

Hart says he has heard talk at the scales from people who are speculating that copper scrap could reach $3.50 per pound in the near future. “It’s hard to speculate on what the supply will bring,” he adds.

 

KEEP MOVING

Many truisms come into play. One adage holds that it is better to sell and be sorry than not to sell and be sorry. Many copper recyclers say they have bought into that idea.

 

“I’m banking the margin and keeping the scrap flowing,” Greenberg says. He looks at the copper catastrophe of 2008 as an object lesson in taking a decent profit and moving on.

 

“Before you decide if want to hold on to try to make that extra nickel, you’d better ask yourself if it is worth it,” he says. “It is much more unlikely that the market will go up than that it will drop. What is supporting the market?” Greenberg asks. “There is a lot of downside risk. I tell my customers to make their money while they can.”

 

Friedman, offering a lesson from Economics 101, says hedging is a positive of the copper market. “I tell my recyclers who do not hedge that they are really rolling the dice. If you’re holding copper today and are not hedging, you are using very large dice,” he adds.

 

If it is any consolation to copper recyclers, they are not alone in facing a topsy-turvy market. Friedman says other metals, such as nickel, are in the same situation.

 

New Copper Mine Moves Forward

Augusta Resource Corp. is reportedly moving ahead with its planned $900 million investment to mine the Rosemont copper-molybdenum deposit near Tucson, Ariz. The site could become the third-largest copper mine in the United States, though plans have met with concerns from local residents and environmental groups. According to Industrial Info Resources (IIR), Sugar Land, Texas, the Rosemont mine could be up to full production by 2012. The open-pit Rosemont copper-molybdenum mine would then account for 10 percent of newly mined U.S. copper output, producing 200 million pounds per year, plus 4.7 million pounds per year of molybdenum and 2.4 million ounces per year of silver. The deposit has a resource base of 7.7 billion pounds of copper, 190 million pounds of molybdenum and 80 million ounces of silver, giving it a likely life span of 20 years in production. Augusta Resource Corp., based in Vancouver, British Columbia, has been working with state and federal agencies on a draft Environmental Impact Statement likely to be released early in the second quarter of 2010. After public meetings and a comment period, a Record of Decision from review agencies is likely in the fourth quarter of 2010, according to IIR. If Augusta receives its permits and regulatory approvals when it anticipates, the company will begin construction by the end of the fourth quarter of 2010, with an anticipated completion date of late 2011 or early 2012.

“Why is nickel going up?” he asks. “How is it that lead is more expensive than aluminum? It’s the same with zinc—you can’t give it away, yet prices are strong.”

 

Friedman continues, “When the speculators get nervous, the price will come down. It could come down with a vengeance.”

 

Not everyone says they expect the bottom to fall out. Hoelscher says he sees the copper market continuing to go up and down by 10 percent for the near future. “I think it will continue steadily.”

 

CHINA’S INFLUENCE

There is little doubt that China will continue to be a strong factor in the copper market. The country is a huge market for copper scrap. The bulk of Global Recycling’s copper scrap goes from the East Coast to the Far East. “I don’t see any sign of them slowing down,” Greenberg says of copper buying activity in China. “It is busy over there. They are building, building…even in a time when people say things are slacking off.”

 

Friedman also says he sees the Chinese as a major driver in consumption. As long as they remain strong in the market as consumers, the market has underlying strength. Yet, Friedman is part of the chorus advising scrap dealers that now is a good time to sell.

 

“The downside risk is greater than the upside potential,” he says of holding on to copper scrap in anticipation of additional price increases.

 

Hart says he expects the LME to continue its swings but in a tighter range: up a nickel, down 3 or 4 cents. “We buy coast to coast, and there seems to be all sorts of material out there,” he says.

 

In the case of Shine Bros., the solid ferrous scrap prices have not greatly changed material flow because the mainstay of the company’s iron comes through its auto shredding operation rather than peddler traffic, producing a steady supply of ferrous scrap.

 

Greenberg notes that nobody knows for certain what is happening in China. The Shanghai market could have 50,000 tons banked for all anyone knows. If China starts to send that copper onto the market, there is little question that the market will react. To some observers, the Chinese have proved many times that they are better at manipulating the capitalist system than many capitalists ever dreamed they would be.

 

“The markets used to move on fear and speculation,” Friedman says. Because there are wars all around the planet, fear is not moving the market.

 

Therefore, Friedman again points to speculators as the current driver behind escalating copper scrap prices.

 

“We’ll grow our way out of the supply,” Hoelscher says, adding that he is optimistic about continued strong copper scrap consumption.

 

“I was brought up in an era of $1 copper,” Greenberg says. “I think $3.40 copper is good. I’ll take it all day. I just wish the swings were less dramatic.”

 

The author is a freelance writer based in Cleveland. He can be contacted at curt@curtharler.com.