Monumental Shift

Statistics compiled throughout the early part of this decade regarding copper scrap tell an amazing tale, particularly in the category of U.S. exports. As domestic secondary refining and smelting capacity stayed static or dwindled, depending on the segment, copper and brass scrap buyers from China took advantage of the lackluster domestic scrap demand to feed new Chinese furnace capacity coming online.

After several quarters of increased scrap buying, a combination of factors took many Chinese buyers out of the U.S. market this spring. Domestic scrap processors and consumers are anxious to find out whether Chinese copper scrap buying has reached its peak or if it is just taking a short break.

COOLING OFF. Throughout the second half of 2003, news organizations in China—which often directly or in couched terms express the policy intentions of the central government—carried comments from Chinese economic officials that the nation’s metals segment was expanding too rapidly.

These statements urging caution seemed to be in conflict with what was happening in the nation’s industrial cities, where new smelting and production capacity was being introduced regularly.

Buying patterns in 2003 by copper and brass production facilities in China continued the theme established the prior three years: Chinese buyers sought copper-bearing scrap generated in North America from every source they could find.

The situation resulted not only in dramatic price increases for copper scrap, but also disappearing margins for North American consumers of the material and even accusations of outright shortages of copper scrap.

By late 2003 and early 2004, copper scrap consumers were calling for a federal investigation into the situations and petitioning for copper scrap export restrictions to protect their industry.

But also in 2004, just as domestic consumers were beginning to get desperate, the Chinese government has started taking steps to follow up on its warning signals that its metals industry is growing too fast. A variety of import-export regulations have been formulated, and civic and provincial officials have started vowing that they will shut down metals production facilities this year.

FIGHTING THE LAST BATTLE? Ultimately, what copper producers and their suppliers might be trying to determine is whether the steamroller of rapid Chinese copper industry growth has paused or peaked permanently.

If a genuine peak has been reached, this should mean that demand and supply domestically has begun to balance back out, and that workable margins can be put in place for dealers, processors and consumers alike.

Such a situation would mean that the battle to restrict exports of copper scrap might wither away of its own accord, as domestically-generated scrap starts staying in North America.

Certainly, the scenario as it occurred in 2002 and 2003 prompted consumers to seek strong action to slow down the export tide. Requests for export restrictions drew a strong counter-reaction from scrap processors and dealers, represented in large part by the Institute of Scrap Recycling Industries Inc. (ISRI), Washington.

The Non-Ferrous Founders’ Society, Park Ridge, Ill., and the Copper and Brass Fabricators Council Inc., Washington, led the effort to ask the U.S. Department of Commerce to monitor and restrict copper scrap exports.

After three years of watching Chinese demand for the materials escalate, the industry groups say the situation has caused damage to their member companies and shows no signs of reversing itself.

The two organizations argue that adequate volumes and reasonable prices for copper and brass scrap are essential and central to successfully meeting the U.S. economy’s needs. "Such scrap, however, is now in very short supply and obtainable only at high and rising prices," a spring 2003 petition from the group reads.

The groups cite statistics showing that in 1999, the U.S. exported just 86,500 metric tons of copper-based scrap to China, accounting for 27 percent of total U.S. exports of the material. In 2000, the volume jumped to 214,000 metric tons, or 43 percent of total U.S. exports. By 2003, nearly 533,000 metric tons were exported to China, representing 71 percent of total U.S. exports.

The situation eventually resulted in higher copper scrap prices to reflect the increased demand. But what was a burden for North American copper scrap consumers was an opportunity for scrap dealers, as they responded to the higher prices being paid for scrap by Chinese buyers.

ISRI, representing its dealer members, contends that availability is not the issue, but rather that scrap consumers are more interested in controlling the price of scrap by restricting its overseas markets.

Before any Commerce Department intervention might affect scrap flow, however, new issues of Chinese government oversight are intervening that may provide a more tranquil market.

CAUTION SIGNALS. Throughout the first half of 2004, scrap metals purchases from China have slowed down, matched perhaps by a slowdown of overall metals production there or perhaps by a narrowing of the scrap deficit in China.

Another regulatory wild card has also worked its way into the game in the form of a central Chinese government registration system intended to qualify and monitor shippers of scrap metal into China. (See Scrap Industry News department, pg. 6 of this issue.)

Neither buyers nor sellers wish to load containers of scrap in North America that may be rejected upon reaching China because during the time the shipment has crossed the ocean or otherwise worked its way through the export system, the Chinese mill has been shut down or the shipping party has not properly registered.

The current set of circumstances may have stalled the copper scrap exodus to China, but certainly domestic consumers must be wondering whether it is just a temporary reprieve.

Even with a slowdown in Chinese metals production growth, metals production capacity shifting away from a static manufacturing base in North America to the growing manufacturing sector of Asia may be inevitable.

As scrap dealer Marty Forman of Forman Metal Co., Milwaukee, told attendees at an ISRI conference in the fall of 2003, the NAFTA and GATT treaties placed the domestic metals industry in the position of having to compete with overseas producers with dramatically smaller labor and regulatory compliance costs.

The ability of Chinese buyers to pay more for scrap metal because they are paying so much less in labor and production costs is an indication of how that competition is shaping up.

"All I need in the scrap business today to sell my goods at the highest price all over the world is a truck dock," Forman remarked. "I intend to fight back vigorously against anybody who wants to take [the export market] away from me."

Policy makers on the federal level can consider whether they should intervene with global market forces that seem to be shifting metals production to the lowest-cost labor markets—which means away from North America.

The author is editor of Recycling Today and can be contacted at btaylor@gie.net.