Trickle down

Trading a commodity with a falling price borders on guaranteeing that profits will be scarce or nonexistent, but nonferrous scrap recyclers also say that abandoning customers in a down market will cause the greater long-term harm.

Through most of 2015, copper prices have predominantly headed lower, creating a market in which recyclers cannot seem to outpace the declining value of their inventories.

While recyclers are by no means fond of these circumstances, many of them say their biggest concern is not their inventory value but rather the effect of lower prices at the scale house. Although lower copper values cause one type of headache, diminishing volumes create the twin problems of reduced cash flow and difficulty filling consumers’ orders.
 

Volume reductions

Recyclers contacted in late July were unanimous in their assessments that as copper prices have fallen, so has the volume of copper and brass scrap flowing into recycling plants.

“Business has slowed considerably, and the material is not coming in at the pace we would like,” says Todd Safran, vice president and chief operating officer at Safran Metals in Chicago.

Safran Metals purchases wire and cable scrap from dealers throughout the Midwest and other regions within trucking distance of Chicago, and its dealer customer base (on average) has not produced the same volume of scrap in 2015 as it did in previous years when copper was trading at more than $3 per pound on commodity exchanges.

“The smaller dealers have definitely seen a slowdown in business,” Safran says.

He adds that the problem only has been made worse by falling steel and ferrous scrap prices. “With ferrous being down, that [also] has slowed a lot of the peddler business. With lower steel prices, plenty of scrappers have to justify the pickups—the price of gas and their overhead—before deciding whether to buy and move a load,” he comments.

Another Midwestern scrap recycler, who asked to remain anonymous, has seen identical circumstances. “Material flow has slowed down dramatically overall,” he says. “We are still seeing a steady flow of material for processing, just not at the levels in the recent past.”

Adding to the problem for larger scrap companies that prepare materials for consuming facilities is that some of the scrap collected by small dealers is being intentionally held back as they await a rebound in COMEX copper pricing.

“We see a trickle-down effect as the smaller accounts are just not selling at these levels, which in turn hurts volumes to the [medium-sized] dealers we do business with,” says the Midwestern recycler.

The scrap generators and small dealers “who have the smaller quantities tend to sit on material in falling markets, hoping for a rebound,” Safran says. “We all get a little spoiled in a $3 copper market, so when prices drop like they do, people tend to buy and hold with the hope that the market will rebound. Once you have sustained downside movement, the dealers see less people across the scales, and therefore there is less material for us to process and move.”

If there is a brighter side to the red metals market in 2015, it is that industrial scrap generation is holding steady and that larger scrap dealers are keeping the market fed with material to produce enough cash flow to sustain operations.

Bernard Schilberg of nonferrous recycler and wire processor Prime Materials Recovery, East Hartford, Connecticut, says, “The flow from our industrial accounts (primarily wire and cable companies) has been very steady. The building, specialty and telecom sectors have been robust, [but] the data communication and energy sectors are slow.”

The Midwestern recycler says, “Industrial accounts are hit and miss, depending on the sector they are in. Automotive and related businesses are doing fairly well.”

He says his largest scrap processing competitors, particularly the publicly traded ones, “just keep buying and selling into these markets as margins allow.”

A recycler in the South, who also asked to remain anonymous, says the entire market is in an adjustment stage as the price of copper heads back to its historic norm as the commodities “super cycle” stoked by China’s infrastructure build-out recedes.

“The big boom from China is over—we’re just hearing the last echoes,” he states. “I’m not sure that people waiting for a rebound to $3-per-pound copper have the right idea.”

If a “new reality” of copper trading at well under $3 per pound has indeed set in, it may take a while not only for the scrap market to adjust but also for scrap consumers who make copper and brass products.
 

Building up business

Copper and brass producers, like many metals producers, are healthiest when North America’s construction sector is booming.

Although the U.S. construction industry has clawed its way back to better relative health than what it experienced in 2008 and 2009 after the financial crisis, a sharp peak in activity that sometimes follows a recession has yet to occur.

With China’s demand for U.S. red metal scrap beginning to decline noticeably (See the table above, “Staying at Home.”), nonferrous recyclers in North America are particularly eager to see a construction activity spike that would help create more domestic demand for scrap.

As detailed in the feature article “Positive Prognosis” in the August 2015 edition of Recycling Today, producers of copper and brass in North America are awaiting that same spike. While long-term trends favor the renewed use of copper and brass in construction applications, red metal refineries and mills in the U.S. generally are not operating at full throttle.

Subsequent to the August article being prepared, brass mill operator Mueller Industries, Memphis, Tennessee, released its second quarter 2015 financial results.

The company’s net sales fell relative to the second quarter of 2014, and the commentary accompanying Mueller’s results cites several reasons. “Net sales for the second quarter of 2015 were $555.6 million compared with $649.7 million for the same quarter of the prior year,” the company says, spelling out a 14.5 percent decrease in sales. “Approximately $44.1 million of the decline was due to lower unit volumes, $36.6 million was due to lower selling prices as a result of lower copper prices, and $17.7 million of the decrease was due to divestitures of businesses during 2014.”

While the steel industry in North America has complained in 2014 and 2015 about low-cost steel from China supplanting domestic demand, Mueller says currency volatility has negatively affected its business, adding that its brass rod division “felt the impact of increased competition from imports helped by the weakened euro.”

Mueller Industries says its health “is importantly linked to: 1) the construction of new homes; 2) the improvement and reconditioning of existing homes and structures; and 3) the commercial construction market that includes office buildings, factories, hotels, hospitals, etc.”

Despite the current difficulties, Mueller Industries CEO Greg Christopher says, “We are pleased to see the steady improvement in market conditions continuing.”

In assessing the buying patterns of domestic red metal scrap consumers overall, Safran says, “Consumers are not too hungry for metal right now, [and they are] only taking what is needed.”

He adds, “Copper and all commodities are still demand driven, and if the consumers aren’t hungry for the metal, it trickles down to all levels of our industry, and everyone feels it.”
 

Live to fight another day

Scrap recyclers may need to call on several motivational sayings designed to help companies get through down cycles before they start seeing a copper market rebound.

Schilberg points to hedging when trading as being a critical step to fend off large losses that can be caused by volatile pricing. “Prime’s company policy is to hedge all purchases and sales so we never get hurt speculatively,” he states.

He also points to a modest list of “positives” in a lower price environment. “The upside to lower inherent prices is lower accounts receivable exposure, less capital needed to operate and less incentive for dealers to speculate.” He adds, however, “This does not outweigh the negatives.”

Safran, whose family business now overseen by his father, Steven, dates to 1939, cites the importance of staying in the market and meeting customer expectations. “Hopefully our stability regardless of market conditions enables dealers to move their metals a little faster if needed and not get caught long in a bear market,” he says.

A lower priced market, Safran says, is not the same as a hopeless one. “Things are slower than we would like, and everyone in the business is complaining to a degree, but we continue to stay busy due to the proactive way we look at the daily markets and deal with our customers and consumers.”

Among the industry-specific quotes that apply across all market conditions is “scrap is bought, not sold.” The advice remains a beacon to follow in the 2015 market.

“All we can do at Safran Metals is continue to be a competitive buyer, whether that be of truck loads or smaller quantities,” Safran says.

The southern recycler makes a similar observation, stating, “You have to protect your ‘buy’ price. It’s no different than the previous 28 times this has happened.”

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