Silver Linings Hard to Find in Copper Markets

When New York financial markets rejoice over layoffs in your industry, you know you have problems.

Such was the case early last month when a major copper producer announced it was laying off 150 employees. This coupled with a drop in warehouse inventories caused copper prices to move up sharply on the Comex division of the New York Mercantile Exchange. As Recycling Today was going to press, London Metal Exchange (LME) warehouse stocks dropped 1,575 metric tons to 371,525 metric tons. The Comex March contract climbed 1.90 cents to 79.50 cents a pound. At the end of February, the three-month LME price bottomed out at $1,634 per metric ton (or 74.12 cents per pound). The Wall Street Journal reports producers have cut production by 330,000 tons in recent weeks.

But this news brings cold comfort to those in the copper markets and those who have lost their jobs. Most of those with whom Recycling Today spoke to are in agreement that the copper markets are facing tough times in the days and weeks ahead.

GLOBAL OVERSUPPLY

“Clearly there is an oversupply of copper globally, which is leading to depressed prices,” says Daniel Edelstein, commodity specialist, U.S. Department of the Interior, U.S. Geological Survey (U.S.G.S.), Reston, Va.

Edelstein notes that there is a perception in the marketplace that the oversupply might extend several years. Although he himself would not predict where prices are headed, Edelstein says that analysts are anticipating copper prices will stay low.

The U.S.G.S.’s most recent report on Metal Industry Indicators shows that the copper leading index dropped 0.7 percent to 119.3 in December 1997, from a revised 120.2 in November. Its growth rate fell to –3.9 percent in December from a revised –2.6 percent in November. This was the lowest growth rate for this index since mid-1995. The leading index, according to the report, indicates “very weak growth or possible decline in domestic copper activity in the coming months.”

“High copper prices encouraged production,” says Don Lewon, president of Utah Metal Works Inc., Salt Lake City. But these mines are costly to operate and if copper prices remain low as anticipated, Lewon foresees some mines being forced to shut down.

This was borne out recently when Chile’s Escondida mine announced plans to shut down its Coloso leaching plant until late May. In addition, the Broken Hill Proprietary Co. plans to temporarily shut down operations at its Pinto Valley copper mine and mill in Arizona.

THE ASIAN FLU

Janice Jolly, an independent copper consultant in Dayton, Md., points to the Asian crisis as a crucial factor in what’s happening in the copper markets.

“With the Asian markets falling apart, there is a softer demand for copper than anticipated,” says Jolly.

Richard Cosway, an executive with a large metals processor in the South agrees.

“Asian countries are buying less copper scrap,” says Cosway (a pseudonym). “They used to buy two to three months worth at a time. But now they’re only buying in spurts.”

This is especially bad news, according to Bernard Schilberg, executive vice president of Schilberg Integrated Metals Co., Willimantic, Conn. He points out that Asia uses approximately 50 percent of the world’s copper. As Asian economies collapse, or at best retrench, the hit on copper becomes substantial.

Jolly says the big drop off in demand for copper has occurred in countries such as Thailand, Malaysia, Indonesia, and, yes, even China.

HIT AT A BAD TIME

Edelstein says the Asian crisis hit at a particularly bad time for the copper markets. Large production increases came on-line in the United States, Peru, Chile and Argentina, leading to an oversupply situation in a sea of decreasing demand for refined copper. The Chinese have failed to oblige the world markets by gobbling up the excess capacity.

“Copper pricing and inventories are tied closely worldwide,” says Edelstein. “It’s really a global market.”

Don Zulanch, senior vice president of Cohen Brothers Inc., Middletown, Ohio, agrees.

“We live in a world economy in which we have to compete,” says Zulanch. “We’re going to have to lower prices for our goods if Asia starts dumping goods in the United States. This will drive down the prices of metals. People will have to buy copper at lower prices to stay competitive.”

Michael Friedman, president of Friedman Metals Brokerage Co., York, Pa., believes that the Asian flu is temporary and curable. He notes that business in the United States is good overall.

“The economy is healthy,” says Friedman. “Mortgage and interest rates are good. We should really be doing well.”

Zulanch adds that there is still a strong demand for copper in the electronic and automobile sectors.

In the automobile sector, Zulanch says, “Copper is not losing market share to aluminum or plastics. Aluminum and plastics are not shoving out copper.”

Jolly agrees. She notes the strong demand for copper wire in the electronic sector and copper tubing for use in making fire sprinkler systems. “The demand for copper in the U.S. is good,” says Jolly.

Cosway adds that El Nino may actually help the copper industry.

“If the summer of ’98 is an unusually hot one there will be a strong demand for air conditioners. The demand for copper tubing could take off.”

Cosway also notes that a mild spring nationally could give an early start to more construction activity with a corresponding increase in the demand for copper.

Currently, strong demand makes for tight markets for rod, cathode and scrap. Then why aren’t the copper markets doing well? Investors’ perceptions may play a part, according to Friedman.

“Where do you put your money today,” he says. “Do you put it in IBM stock or copper?”

DOMESTIC DEMAND STRONG

As was the case last year, the better grades of scrap are in greatest demand. “Higher grades are in greatest demand now,” says Lewon. “No. 2 copper is also in demand.”

From January through October 1997, total scrap used by smelter and refineries, ingot makers, brass and wire-rod mills and foundries totaled 1,450,000 metric tons. This compares with 1,370,000 metric tons for the same period in 1996 and 1,630,000 metric tons for all of 1996.

For unalloyed scrap, smelters and refiners consumed 327,000 metric tons and brass mills consumed 367,000 metric tons. For alloyed scrap, smelters and refiners consumed 259,000 metric tons and brass mills consumed 464,000 metric tons. Total scrap consumption for smelters and refiners and brass and wire-rod mills was 586,000 metric tons and 828,000 metric tons, respectively.

SCRAP DEALERS HOLDING

The acute shortage of copper scrap has come about as scrap dealers hold on to their stock until prices go up.

Schilberg also notes that generators of copper scrap are becoming more efficient in manufacturing processes. This has lead to a decrease in the supply of prompt copper scrap.

Another factor in the scrap supply mix, according to Schilberg, is that copper scrap consumers are using greater amounts of copper scrap to make their products.

Friedman believes that scrap dealers who turn over their inventories will be okay.

“If a scrap dealer starts to speculate and gamble, he will get into trouble,” says Friedman. “If the scrap dealer starts hoarding, he will get into trouble.”

NOT JUST IN U.S.

The scarcity of copper scrap is not just confined to the U.S.

“Europe is acutely short of copper scrap,” says Bob Stein, manager of nonferrous metals for Louis Padnos Iron & Metal Co., Holland, Mich.

Schilberg notes that demand for copper scrap is particularly strong in Germany, France and Spain.

Shortages of scrap are so acute in Europe there are reports that some consumers are finding it cheaper to buy standard cathode than bright wire.

Kevin Weppler, manager for Secondary Copper Markets, Noranda Metallurgy, Inc., Toronto, says that his firm is seeing pressure in terms of scrap. He points out that the Chinese are buying sizable amounts of No. 2 copper. But he says that the Asian flu has not had a direct effect on the material Noranda is buying.

From January through September 1997, the U.S. imported 73,200 metric tons of unalloyed copper scrap. In all of 1996, the U.S. imported 90,300 metric tons of unalloyed copper scrap. From January through September the U.S. imported 91,200 metric tons of alloyed copper scrap. In all of 1996, 122,000 metric tons of alloyed copper scrap was imported.

On the export side the figures break down as follows. From January through September 1997, the U.S. exported 160,000 metric tons of unalloyed copper scrap. This compares with 197,000 metric tons exported in 1996. From January through September 1997, 134,000 metric tons of alloyed copper scrap was exported. In all of 1996, 195,000 metric tons of alloyed copper scrap was exported.

AS COPPER GOES…

So goes brass. Or does it?

“Brass follows copper,” says Zulanch. He foresees a downward trend in the brass markets if the situation in copper doesn’t improve.

Larry Adelman, president of Admetco, Inc., Fort Wayne, Ind., agrees.

“The brass markets seem to be suffering right along with copper,” says Adelman.

The U.S.G.S.’s Epstein, however, was somewhat more optimistic about the brass industry. He notes that brass mills in 1997 ran ahead of their production in 1996 and that in the U.S. nothing has dampened the demand for brass products.

Cosway is also bullish on the brass market.

“The brass mill business is good and will remain strong for the balance of 1998,” he says.

T&E COSTS

Any look at the copper markets would be incomplete without considering transportation and environmental costs. As with other commodities, transportation and environmental issues are a constant presence – important factors for anyone making a living off copper.

Adelman sees transportation costs going up because of a shortage of carriers. In this regard, copper processors are in the same boat, or perhaps it would be better to say “rail car,” as those dealing in ferrous and other nonferrous metals.

Weppler notes that the freight component is becoming a larger concern in the copper scrap markets. This is the case “when you ship a less valuable material,” says Weppler

But Friedman has a different take on things. He says transportation rates are down and does not foresee any big domestic freight rate increases in the near future.

“The domestic freight people are getting very competitive,” says Friedman.

On the environmental side of things, Jolly points out that constraints on processing copper scrap increases costs and will decrease production of copper from scrap.

Friedman notes in recent years there has been a shift in the industry’s relationship with the Environmental Protection Agency (EPA). “The EPA wants to work with people, rather than punish them,” says Friedman. “We now have more of a partnership with the EPA.”

Friedman says smelters have put sizeable investments into meeting environmental regulations and more and more scrap yards are “moving inside.”

“The dirt floor guys are a thing of the past,” says Friedman.

Perhaps the most important environmental issues on the horizon for those in the copper markets concern those pertaining to Superfund legislation.

Lewon notes the efforts by the Institute of Scrap Recycling Industries Inc. to bring about change. Whether or not this evolves into a major legislative battleground will unfold in the months ahead. Whatever the case, it will have profound implications for those in the scrap and recycling industries.

WHAT’S NEXT?

For now, silver linings are hard to find in the copper markets. Things can change, however. Asia could cure its flu – either through its own initiatives or through some U.S.- or International Monetary Fund-led bailout. The economics of supply and demand could tilt in a more benevolent manner.

Perhaps, Cohen Brothers’ Zulanch has the best take on things. Zulanch believes the outlook for the domestic copper scrap market is still good.

“A lot of people will make money, but not at the lofty levels of before,” says Zulanch. “We can live with a ten percent drop in price. It will be business as usual, but not at the same high levels.”

The author is editor of Recycling Today.