Nonferrous

CONCERN OVER COPPER GROWS

During the Institute of Scrap Recycling Industries Inc. (ISRI) Commodity Roundtable in mid-September, speculation on the future of the copper market drew a lot of attention. Several industry analysts who spoke at the event said they saw growing signs of a decline in price for the commodity. And, depending on the speaker, the decline could be quite significant and could come sooner, rather than later.

David Threlkeld with Resolved Inc., a firm based in Scottsdale, Ariz., that trades in nonferrous metals, said, "We are enjoying unprecedented prices. If these aren’t legitimate prices, we will pay for it down the year."

Threlkeld acknowledged that funds are playing a much greater role in the market. "No one knows the volume of the market right now," he said.

As a cautionary note, Threlkeld said that collapses generally happen in September and October. "We could be leaning toward a situation where we could get fund liquidation. We have a market now that is close to double in price in the last year."

In further support of his bearish outlook, Threlkeld said that copper consumers have already been making substitutions. Meanwhile, with the higher prices for secondary copper, consumption is declining as production is increasing.

As much as a gloomy forecast as Threlkeld presented, another speaker, Megan Hovey-Carpenter with Rosenthal Collins Group LLC of Chicago said that while there may be some retrenching, "I would expect we remain a bit stronger, with some softening next year, although not too bad."

Warren Gelman with Kataman Metals of St. Louis noted that during the past four years, copper markets have moved from 70 cents to $3.40. "We believe that markets are tremendously overpriced," he said. "We don’t know when the markets will drop. We are seeing a slowdown in housing business."

In supporting his outlook, Gelman said that some consumers are sharply cutting their monthly orders. "China has taken a back seat," he said. As a result of these trends, copper has flooded the domestic market.

Daniel Schwab with Philadelphia’s Metallic Recovery Group acknowledged the volatility in the market. He said that as a protection against sharp moves, Metallic Recovery Group is keeping its speculative positions to a minimum. "My big concern is, are we going to get paid. This is too much risk in the market right now. Keep it on a short leash."

While short-term fluctuations in copper markets are cause for concern, Hovey-Carpenter said, "Copper is still a good investment."

Although the overall sense for copper was bearish, analysts provided a more upbeat outlook for aluminum.

During the Aluminum Roundtable discussion, Lloyd O’Carroll with Davenport & Co. LLC, an investment and research firm based in Richmond, Va., noted that China continues to be the driving force for the aluminum market. In his opening remarks, O’Carroll said that consumption in China and Europe is strong. He added that even with increased aluminum capacity, production is rising only minimally.

Andrew Stein with TST Inc., Fontana, Calif., agreed that China warrants constant attention. While coastal regions of the country may be the first to feel the impact of China’s purchasing, "Everyone is a transportation cost away from China," he said. "As that country increases its consumption, it will be something to watch," Stein added.

While aluminum markets have held up fairly well, some dark clouds were forming on the horizon, according to the event’s speakers. O’Carroll noted high energy prices, higher borrowing costs and a slowdown in the housing market as areas of concern for aluminum. While acknowledging that these factors are potentially negative for aluminum, O’Carroll said he didn’t expect to see a recession.

O’Carroll added that while hedge funds are playing a greater role in the market, "These guys are technically driven. They are pure momentum buyers. They don’t change the price, but exacerbate volatility."

With consolidation occurring in other metals industry segments, the speakers said they felt the aluminum industry would also be affected, as many of the industry’s top players strengthen their positions with downstream acquisitions.

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