Picking up the pace

Investors and economists were professing high levels of concern on several fronts and very little optimism as of mid-January 2016. Fitting into the general mood was the status of copper pricing, which has fallen from its high of $4.58 per pound in February 2011 to $2 per pound in mid-January.

Steadily falling copper pricing has presented one challenge for nonferrous scrap recyclers in the past two years, but a more worrisome aspect of the market has been the curtailing of supply.

Looking forward, red metal scrap sellers, processors and buyers will be watching economic conditions and copper industry conditions around the world to try to determine whether higher pricing or more robust scrap flows may yet bring some good cheer in the year ahead.

MATERIAL ISSUES

Quarterly and annual financial reports filed by publicly traded companies can help provide a snapshot of the decline in nonferrous scrap flows in 2015. These drops in volume can be attributed in part to a decline in copper pricing that has slowed the flow of red metal scrap across scales.

The figures and accompanying statements issued by the companies throughout 2015 and early 2016 repeat some common refrains:

• As part of the announcement covering the financial results for its first quarter of fiscal 2016, which ended Nov. 30, 2015, Irving, Texas-based Commercial Metals Co. (CMC) made reference to its nonferrous scrap operations. “During the first quarter of fiscal 2016, average nonferrous volumes declined 12 percent,” the company states, adding that its “nonferrous metal margins were compressed by 22 percent relative to the corresponding period” in 2014.
• In mid-November 2015, Sims Metal Management, with corporate headquarters in Sydney and New York, issued a profit warning for its upcoming quarterly results and the first half of its 2016 fiscal year (covering the second half of calendar year 2015). Regarding its decline in ferrous and nonferrous scrap flows, the CEO and chief financial officer of Sims reports, “As a consequence of lower commodity prices, intake volumes for the first four months of the first half of fiscal year 2016 [covering July through October 2015] fell 26 percent versus the corresponding period [in the previous year].”
• Steelmaker Nucor Corp., Charlotte, North Carolina, which also owns scrap processing and trading firm The David J. Joseph Co., Cincinnati, issued an earnings performance warning for its quarter ending Dec. 31, 2015. The company does not refer to volumes, instead stating, “We expect lower performance in the raw materials segment due to lower scrap and metallic commodity prices at our scrap processing businesses.”

Managers of family-owned scrap companies contacted by Recycling Today report nearly identical conditions, with recyclers from different regions of the country all seeing similar volume reductions. (See “Blue New Year” in the deparment "Nonferrous" of this issue.)

When scrap generators and smaller dealers hold onto supply, it is most often with the hope that prices will rise, in part in response to the shortage of material.

For prices to rise sustainably, however, demand for red metal scrap will have to be stable at least and ideally gain momentum. More broadly, the supply of mined copper also will have to become tighter relative to global consumption and demand.

Whether that is in the cards is difficult to say. Domestically, the U.S. economy may prove to be a stable source of copper consumption and red metal scrap demand, though it appears red metal scrap consumption figures will be down in 2015. Internationally, the forecasts for China in particular are highly skeptical.

ON THE HOME FRONT

In 2014, U.S. wire rod mills, brass mills and other red metals producers combined to consume 945,000 metric tons of copper-bearing scrap, according to data gathered by the United States Geological Survey (USGS), Reston, Virginia.

In the first nine months of 2015 (the most recent time period for available data), these domestic consumers had melted 669,000 metric tons of scrap, putting them on pace to consume 891,000 metric tons by the end of the year.

That 5.7 percent decrease partially may be the result of a lack of scrap availability. Although China is buying less red metal scrap from the U.S. than it has in earlier years, the dwindling supply of scrap has caused consumers to consider their alternatives.

While U.S. copper and brass mills and refineries used 5.7 percent less scrap in 2015, they actually increased their consumption of refined copper, according to USGS data.

Based on the pattern in the first nine months of the year, domestic mills and refineries likely were to consume 1.89 million metric tons of refined copper in 2015, signaling a 7.4 percent increase compared with the 1.76 million metric tons consumed in 2014.

U.S. wire rod mills likely will increase their refined copper consumption by 8.1 percent, while refined copper intake by domestic brass mills will tick upward by 7.2 percent.

Overall production figures at such facilities have enjoyed relative stability in the U.S. in 2014 and 2015 as the nation’s automotive and construction sectors have seen steady sales and moderate growth, respectively.

The automotive sector finished 2015 selling more than 17.4 million cars and light trucks in the U.S., reaching a new high. Considering the global consumption of automotive wire and cable has risen from 415,000 tons in 1994 to 538,000 tons in 2014, according to the Copper Development Association (CDA) of New York, scrap suppliers to wire rod mills will be rooting for sustained momentum in the automotive industry.

In the construction sector, Ken Simonson, chief economist for Associated General Contractors (AGC), Arlington, Virginia, reported in early January 2016 that “every type of construction has outperformed its 2014 pace through the first 11 months of 2015.”

Private residential spending increased 10.8 percent over the 12-month period from December 2014 to November 2015, while private nonresidential construction spending rose 13.6 percent during that time frame.

The consumption of building wire globally, which checked in at 1.03 million tons in 2014, according to the CDA, has a long way to go to reach the figure of 1.7 million tons attained in 2005. While a construction rebound in the United States may be helpful in seeing that number climb back up, when it comes to building booms and copper wire demand this century, activity in China is likely to drive the primary copper market as well as the red metal scrap market in 2016.

THE OUTSIDE WORLD

Economists venturing into the forecasting realm for 2016 uniformly have pointed to China and its ability to maintain gross domestic product (GDP) growth as a key to determining how commodity prices will trend in the coming year.

Wang Jiwei, vice president and secretary general of the China Nonferrous Metals Industry Association Recycling Metals Branch (CMRA), said the “new normal” of slower economic growth in China made 2015 a difficult year for producers, with “capacity rates of some enterprises [being] less than 50 percent.”

During China’s 12th Five Year Plan era from 2011 to 2015, major investments in nonferrous production created facilities capable of producing up to 750,000 tons per year of copper or lead in one place.

The five-year time frame also will have witnessed China having brought in some 33 million tons of imported nonferrous scrap, according to Wang.

USGS figures, obtained by the U.S. Census Bureau, show China’s demand for copper-bearing scrap from the U.S. having fallen significantly in 2015. China imported 727,000 metric tons of copper-bearing scrap in 2014 and was on pace to import 674,000 metric tons in 2015, representing a 7.3 percent drop.

The ability of copper and brass producers in China to maintain similar scrap buying volumes in 2016 will depend largely on whether the nation’s leaders can successfully maintain GDP growth without relying on as many massive infrastructure projects or the propping up of bloated state-owned enterprises.

For scrap recyclers, the events in China are just one of many factors that will affect how much red metal crosses their scales in 2016 and what price range they can expect.

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