Hedging Bets

*Average monthly settlement price, cash buyer; U.S. dollars per metric ton.       Source: London Metal Exchange, www.lme.com

As the second half of the year progresses, the short-term outlook for many nonferrous metals is hazier. Much of the uncertainty hinges on global economic indicators, which appear to point to a challenging short-term market. Many economists forecast that the U.S. economy, if it does not fall back into recession, will grow at a disappointingly slow rate. This less-than-stellar outlook creates apprehension among traders of nonferrous metals.

Most scrap dealers contacted for this report say, despite the short-term direction of the market, they are moderately optimistic about the overall trend in the nonferrous metals sector. Several of these sources point to a steady increase in copper and aluminum scrap generation, though several add that generation dipped somewhat surprisingly in early August.

Prices for copper, aluminum and stainless steel have softened in August, and the sense that more softening could occur throughout much of the third quarter of 2011 is growing.

While prices are a bit softer in August than in July, scrap dealers, especially those with larger export positions, say a decent volume of material is moving offshore, primarily to China. A key reason for the strength in export markets has been the continued weakness in the U.S. dollar, which makes the export of material more lucrative.

Despite the dip in generation in early August, most scrap dealers contacted for this report say they expect to see modest improvements in copper and aluminum scrap generation on an ongoing basis, which is viewed as a positive sign. However, with the general uncertainty in the market, scrap dealers say they are doing their best to limit their exposure to rapid price swings by reducing their inventories.

For copper scrap traders, purchases on the part of consumers in China continue to exert the greatest influence. As the largest consumer of copper scrap, China has been the key driver of that commodity. Through much of 2011, it appears that Chinese companies have been trying to lessen their market exposure by building up inventory. According to speculation, China, which has seen its economy surge throughout the past five years, may be cooling down along with the rest of the world.

Reflecting the reticence of Chinese buyers, prices, which earlier this year topped the $4.50-per-pound level, have dropped to slightly less than $4 per pound. One scrap recycler notes that copper prices dropped to nearly $3.94 per pound in late August.

Sources say the decline in copper prices is a modest concern. Several traders say the sharp price fluctuations for copper, which makes buying and selling more challenging, have been most problematic.

London Metal Exchange copper inventories in July increased modestly, which may signal further slowing in the European market. However, a report in Futures magazine notes that copper inventories on the Shanghai Exchange declined during the same month, indicating possible renewed interest in copper from Chinese consumers.

The Wall Street Journal reports that China's General Administration of Customs said the country's refined copper imports in July increased by 8.8 percent from the previous month to 194,280 tons, but decreased 14 percent on the year.

The article speculates that the upward bump in buying on the part of Chinese refiners may be a reflection of buyers taking advantage of the brief window during which copper prices on the Shanghai Futures Exchange rose above London Metal Exchange prices, providing a quick way for them to lock into profits.

For optimists, this move also could indicate that Chinese consumers may be restocking their depleted copper inventories after scaling back overall purchases through most of 2011.

Aluminum also is seeing some downward price pressure, several recyclers say. A Midwestern source says scrap and primary aluminum prices dipped because of market-related pressures during August. The source cites a general malaise in the market as being responsible for some of the softening.

While it appears a general sense of bearishness is filtering into the secondary aluminum market, most scrap dealers contacted for this report express optimism that orders will remain available. Another Midwest-based aluminum scrap dealer says generation has slowed somewhat in late summer, though markets are holding up and movement remains decent. "I guess I am an eternal optimist," he adds.

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