Black Clouds Forming?

The U.S. economy continues to show signs of steady improvement. The domestic auto industry is strengthening, to the benefit of aluminum scrap markets. Most nonferrous metals are holding up fairly well in terms of pricing. However, even with these modest improvements, scrap recyclers appear to be concerned about nonferrous scrap markets.

A key worry for many market observers is the murky outlook for China’s economy. There are indications that China’s economy may experience a greater slowing in 2012 than many analysts originally had expected.

Additionally, according to several recent reports, China has been buying far more copper than it needs to meet its orders for finished materials. If, as several scrap recyclers speculate, China’s raw material purchases are far exceeding its demand for finished products, there could be a significant drop in offshore shipments of copper scrap in the future.

According to a recent article in Forbes, China imported more than 400,000 tons of copper in January 2012, a 13.6 percent increase from figures for January 2011. China’s copper imports were even more robust in December 2011, reaching a record 500,000 tons.

The article offers a number of reasons for why China is building its copper inventories. “Some maintain Beijing sees shortages of the metal, while others think the Chinese are just trying to take advantage of recent price declines. Then there are those who believe that central bank officials are tired of holding U.S. government paper and would like to get their hands on hard assets,” the article states.

While Copper consumption in China is expected to increase again in 2012, it will only be by 6 to 6.6 percent—a decline from the 8.5 percent increase seen in 2011.

This recent accumulation in inventories could lead to sharp declines in copper scrap purchases from China later this year, which would likely be met by sharply declining prices for the material.

One nonferrous scrap dealer heavily involved in exporting says the spread between prices on the Shanghai Futures Exchange and the London Metal Exchange is quite high, which is a cause for concern. The dealer says growing apprehension about a significant correction in nonferrous scrap markets has resulted in his company taking additional steps to protect its export shipments. For instance, the company is requiring a larger deposit before shipping material, which, he says, will prevent many of the payment problems that affected a number of scrap dealers during the beginning of the market collapse in October 2008.

“We are a bit more nervous now. We are looking to draw back a bit,” the scrap dealer says, adding, “The market is fragile right now.”

A scrap dealer based in the Midwest, however, says he is less pessimistic about nonferrous markets, though he, too, sees concerns on the horizon. He says the domestic supply of some copper scrap grades has improved, though other grades remain a bit more challenging to obtain.

Despite the recent optimism created by the improving U.S. auto industry, the Midwest-based scrap dealer says he sees signs that domestic aluminum smelters may be in for diffuclt times and may close in the future.

He adds that aluminum inventories are fairly high, which could work to suppress prices.

A scrap metal recycler in Texas appears even more bearish. “Business in Texas is slow,” he says. “Margins are nonexistent.”

Recognizing the volatility that continues to drive nonferrous markets, he says there is not a lot of excess material available currently.

Unlike many other recyclers who are choosing to keep inventories to a minimum, the Texas-based recycler says his company has been stockpiling material in anticipation of higher prices, though he seems to think an improvement could be several months away.

(More information on nonferrous metal markets, including consuming industry reports and breaking news, is available at www.RecyclingToday.com.)