Scrap Metals Supplement--Red Hot

DOUBLE OR NOTHING. Earlier this decade, copper traders can recall a time when the thought of $1-per-pound copper seemed like a far-fetched notion. But in the second half of 2005, traders were engaged in transactions based on $2-per-pound copper.

The gloomy scenarios of earlier this decade included a North American economy that would stay in the doldrums after the 9/11 attacks; slow-growth economies in Western Europe and Japan; and a wireless world where communication equipment moves toward cellular telephones, wireless networks, satellite signals and perhaps fiber-optic cable.

These scenarios were not completely off base. Communication technology is in fact advancing rapidly, with wireless, satellite and cellular forms of communication being high-growth industries throughout the world.

But some of the other anticipated scenarios did not come to pass. The U.S. economy bounced back impressively, with a booming housing market driving the demand for electrical, telephone and cable TV wiring as well as appliances containing copper tubing.

Consumer electronics ranging from big-screen TVs to pocket-sized multi-functional communication gadgets have been selling briskly, increasing the consumption of copper one ounce at a time.

Far more impressive even than the U.S. economy this decade, though, has been the industrial revolution in China. The development of China’s economy that has its roots in a 1980s decision to welcome outside investment and modernization has picked up at a frenzied pace this decade.

China has grown from being a third-tier consumer of copper in the 1990s, once well behind even mid-sized European nations in its production and consumption of copper. In 2004, it produced between 4.7 and 5 million tons of copper. According to a report from the Xinhua news agency, 1.16 million tons of red metal scrap was melted in China to help satisfy the nation’s hunger for copper and brass products.

The nation has become the consumer electronics workshop for the world, creating a need for copper on that one front alone. Additionally, the economic revolution in China has caused urbanization and the creation of a growing middle class that has prompted both a construction boom (requiring wiring and tubing) and a consumer products boom (more of the same).

Primary copper and copper scrap traders have spent much of this decade trying to figure out how to help China meet the red metals demands of its booming economy. The thriving new demand from China has been pointed to as the leading cause for the upward trend in pricing throughout this decade. Even though the red metals industry has come to terms with the fact that this demand is in place, current supply levels are not necessarily meeting that challenge.

SUPPLY-SIDE ECONOMICS. Anytime there is a supply and demand imbalance, one can point to either side of the equation as being the culprit. In terms of constructing a thesis for the current shortage, several analysts are scrutinizing the supply side.

According to an essay by researcher Andrew Cole in a recent edition of the LME’s The Ringsider publication, a bottleneck "at the smelter level of the supply chain, due mainly to a large number of maintenance closures" has been a critical pricing factor in recent months.

Cole also cites a series of worker strikes, accidents causing equipment downtime, and mining firms targeting gold and molybdenum fractions over copper as supply-side factors causing a shortfall in the market.

In the short term this has meant "the massive supply rebound that consensus forecasts are built on is not progressing smoothly and will not be so massive after all," writes Cole. Longer term, though, he also notes that unprocessed concentrate stockpiles are building up to the tune of some 500,000 metric tons on the ground. Cole predicts these stockpiles will make their way to refiners in 2006 "and contribute to a surplus in the order of 300,000 metric tons."

The current shortfall is affecting pricing now, though. Even the sell-off of some 107,000 tons of copper by China’s State Reserve Bureau announced in late November did not move the market downward. "An extra 100,000 tons of material is not relevant really; it’s just a needle in a haystack," American Iron & Metal’s Herbert Black told a Bloomberg news reporter in early December.

The Montreal scrap veteran added that he remains bullish on copper, even speculating that copper could reach $5,000 per ton pricing ($2.50 per pound) at some point.

Just two weeks later, copper on the Shanghai Exchange reached $4,995 per metric ton ($2.27 per pound) before beginning to drop back slightly on December 15.

Analysts wonder whether copper has hit a price point where demand will finally wane. As one example, air conditioning manufacturers are looking more closely at whether aluminum coils can substitute for their traditional copper coils.

Speaking at the ISRI Commodity Roundtable Forum in the fall of 2005, David Lane of heating and air conditioning manufacturer Lennox International, Richardson, Texas, mentioned the introduction of an aluminum coil by a competing manufacturer. Should this prove workable and economically sound, others could follow. "At $1.70 per pound for copper, you’re going to see manufacturers find ways to build units without copper," said Lane, making his remarks before copper broke through the $2 per pound ceiling.

At least one trading firm, Credit Suisse Boston, has speculated that copper could rise to as much as $4 per pound during the next two years if supply continues to lag behind demand.

Securing adequate supplies of copper is important enough that it could be affecting international diplomacy as well. Speaking at the RECCON 2005 event, held in late November of 2005 in Morgantown, W. Va., Carlos Rovelo of the U.S. Department of Commerce noted that Latin American nations such as Mexico and Chile are becoming increasingly involved in a trade triangle along with China and the United States.

In particular, Chile is valued for its copper resources, which is almost certainly why it was singled out as an important bi-lateral trading partner by China. The two nations signed a free trade agreement in mid-November, the first between an East Asian and a Latin American nation.

The agreement between the two governments came upon the heels of a business arrangement struck in late May of 2005 between the Corporacion Nacional del Cobre de Chile (Codelco) and China Minmetals Corp. pledging Minmetals funding for further copper development in Chile.

HIGH-TENSION WIRE. Much like the electricity-conducting wires where a lot of finished copper ends up, the copper trading market is highly charged right now, with traders not wanting to be caught on the wrong side of any volatility.