Under Stress

Effects of the looming industrial recession became obvious during 2008. Copper prices were high throughout the early part of the year, but by late summer, they dropped precipitously as a result of the growing international financial crisis and worldwide industrial contraction. This was a distinct change from the higher prices that were prompted by the supply shortages of the previous four years.

Following the copper oversupply years of 1999 through 2003, the world economic recovery was well underway in 2004, and copper prices reached a high of about $1.50 per pound on the LME (London Metal Exchange) by year’s end. World copper prices continued to rise through 2008, with the LME spot copper price, at several points, exceeding $4 per pound. The average LME Grade A price for 2006 and 2007 averaged $3.05 and $3.23 per pound, respectively. But by December 2008, the price was hovering around $1.35 per pound. Even so, the average price for 2008 was $3.30.

With such lofty prices, scrap supplies for U.S. consumers were tight for most grades, owing to increasingly higher exports. Since 1999, U.S. copper scrap exports experienced extraordinary growth to the Far Eastern countries, and to China in particular.

World copper was in short supply throughout most of 2005 through 2008. Shortages persisted despite constant efforts by the major copper producers to bring mines back on stream or to start new mines to increase production. Labor strikes, lower ore grades and other production problems seemed to plague the industry.

The supply/demand deficit for 2005 was 73,000 tons, according to the International Copper Study Group (ICSG). At the end of December 2006, total world copper inventories were 1.1 million tons, about 23 percent less than that required to supply the world for one month. Owing to the release of unknown, but apparently significant, quantities of copper from the Chinese strategic stockpile, world copper supplies were partially ameliorated during the latter part of 2006, and prices began to soften.

By year-end 2007, visible world copper stocks were estimated by the ICSG to be around 1.4 million tons, up by about 667,000 tons from that of year-end 2005. These inventories represented about 3.7 weeks of average world copper consumption, near the four-week level for world consumption that by many is considered to be "normal," or in balance. Inventories were drawn down during early 2008 to nearly 1.26 million tons. A delicate balance between supply and demand persisted through mid-2008. However, the price of copper started to collapse in September 2008 as world economies contracted.

In August and September 2008, a series of financial "rescue" packages by the U.S. government highlighted the credit crises that would abruptly stifle industry throughout the world. As a result, many copper producers around the world took steps in late 2008 to curtail excess production in an effort to prevent a disastrous overstocking of the metal while the world economies recovered.

By year-end 2008, though most large copper-consuming countries had severely curtailed business, copper inventories had still not reached the high point of 2002, when the accumulated world copper inventories represented well more than two months of industry supply at average rates of consumption. In an attempt to prevent a similar huge buildup of oversupply, most major copper mining companies took stern measures to cut back on production in late November and early December 2008. Inventories on the LME reached 340,000 tons in December, nearly double that of a few months earlier and the most since February 2004.

Between 1998 and 2003, U.S. secondary copper-base scrap collection and processing capacity had been severely affected by surplus world copper production, higher environmental compliance costs and escalating scrap exports to competing nations. Lower copper prices and higher recovery costs from 1998 through 2003 created a cost squeeze that caused the closing of all U.S. secondary smelters and associated electrolytic refineries. Fire refining, which requires a better grade of scrap, held its own through much of the period, but also was affected by occasional cutbacks and closings. Plant closings also occurred in the ingot-making and foundry sectors of the industry.

The significant competition by foreign nations for quality domestic scrap throughout the past 10 years negatively affected U.S. scrap dealers, scrap processors and users alike. A temporary drop in U.S. scrap exports in 2005 probably was the result of the threat from a short-supply petition made to the U.S. government in early 2004 as well as a move by the Chinese government to tighten control on certain metal imports. Although the U.S. government turned down the industry petition for control and monitoring of scrap exports, scrap availability in the U.S. had improved by the end of 2004 for a short period. Some U.S. wire choppers reported significant pickup in activity and a return to profitability. However, by 2006 U.S. scrap exports regained their high pace, which ran through 2007 and most of 2008. Exports were more than double the export rate of 1999.

U.S. scrap processors and their U.S. customers (brass mills, ingot makers and foundries) remained at a critical crossroad through 2008. Scrap supplies through 2006 and much of 2008 remained tight, and some grades were difficult to obtain. Price spreads improved, but because of higher processing costs (labor, environmental, energy and taxes) and high competitive scrap exports, domestic markets remained difficult. Tight scrap supplies were driving prices during much of this period. China, South Korea and India continued to be large importers of U.S. and European scrap.

Refined copper consumption in the United States increased about 10.4 percent between 1994 and 2000 to nearly 3 million tons. However, by 2003 U.S. refined consumption decreased to around 2.3 million tons and then recovered modestly to around 2.4 million tons in 2004. Copper consumption was down again to nearly 2.1 million tons in 2006 and 2007. It also is worth noting that in 2006 the United States imported record amounts of refined copper, reaching nearly 1.1 million tons. This was a continuing sign of a growing and higher U.S. import reliance (nearly 40 percent in 2006 compared with only 2 percent in 1993).

Semifabricate (tube, sheet, strip, rod etc) production at copper consumers has suffered as facilities have closed since 2000. U.S. production of semifabricates at brass and tube mills decreased from 3.9 million tons in 1999 to around 2.9 million tons in 2007. Two main factors contributed to tubing company demise: increased use of plastic pipes for construction applications and increased imports of copper and aluminum tubing from China and other countries.

Further evidence of the industry contraction is illustrated by the fact that an estimated 16 brass mill plants and facilities also have closed in the United States during this period. This occurred despite the fact that the United States was undergoing a tremendous housing boom and supporting a foreign war, both large consumers of copper products.

During the period 1996 to 2007, world refined copper consumption increased by more than 41 percent to more than 17.7 million tons by 2007, an average of approximately 3.7 percent per year. Despite higher secondary exports and lower copper consumption, the United States remained a leading consumer of copper from copper-based scrap with 13 percent of the world’s total in 2007. In 2007, the United States consumed about 3 million tons of copper from all scrap and primary sources, including about 920,000 tons from refined and direct melt scrap.

While the consumption of copper recovered from new manufacturing scrap sources has been increasing in the United States, less copper recovered from obsolete scrap sources is being consumed here. Old copper scrap recovered and consumed by U.S. industry was as high as 613,000 tons in 1980, but was only 161,000 tons in 2007. However, if net scrap exports (632,000 tons in 2007) are classified as old scrap and are included in an estimate for all old scrap recovered, the potential amount of copper in old scrap collected in 2007 was about 905,899 tons (old scrap plus net exports). This much higher value implies that the rate of old copper scrap recovered from the end-use reservoir has not really diminished, as otherwise might be indicated by reported U.S. scrap consumption data.

World trade (imports) in copper-base scrap increased by about 340 percent between 1989 and 2006, largely in response to the increased industrial growth in the Far East and Europe. Asia and Middle Eastern countries received about 76 percent of world copper scrap imports in 2005 and 2006. The United States continued to be the largest exporter of copper scrap in the world, exporting 18 percent of the world’s total copper-base scrap in 2007. Exports of scrap from the United States were more than 900,000 tons per year for both 2007and 2008. China used an estimated 33 percent of world copper recovered from scrap in 2007 and has become the largest copper scrap-consuming nation in the world.

The U.S. secondary copper processing industry currently consists of five fire-refiners, 25 ingot makers, 30 primary brass mills, 14 wire-rod mills and about 500 foundries, chemical plants and other manufacturers. Wire rod mills do not consume much scrap directly. Most of the chemical plants are hydrometallurgical plants that have created businesses based on using secondary by-products produced by other metal production and metal finishing. Many copper chemicals, such as cupric oxide, copper sulfate and others are produced from scrap in the United States. Some chemicals also are produced from the fluid streams of primary copper refiners. While one chemical plant closed in Texas during 2005, another opened in Arizona, associated with a primary producer. Two ingot makers have closed since 2003, as have an estimated 16 brass and tube mills.

As a group, the EU-15 (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the United Kingdom) is the largest ingot-producing entity in the world. However, the United States (28 percent)—followed by Italy, Japan and Germany—is the world’s leading ingot-making country, providing the domestic foundry and brass mill industries with special alloys for casting and milling. Ingot-making, in particular, is a scrap intensive industry, using mostly scrap as its raw material. Even so, the brass mill industry (77.4 percent of 2007 copper-base scrap consumption) consumes most of the copper-based scrap recycled in the United States. Some copper tube and wire rod mills have had secondary smelters or refineries associated with them because of their requirement for high-purity copper. Unfortunately, most of these secondary smelting and refining facilities have closed, because of the recent poor economic environment for processing scrap and the easy availability of low-priced primary refined copper.

In 2007, 84 percent of recycled copper consumed in the United States was derived from purchased new copper-base scrap generated through manufacturing, and 16 percent was from obsolete scrap. According to the U.S. Geological Survey, purchased new copper-base scrap yielded about 845,000 tons of contained copper in 2007, 79 percent of which was consumed at primary brass, tube and wire rod mills. A manufacturer may generate up to 60 percent scrap in the form of slippings, trimmings, stampings, borings and turnings during the manufacture of finished articles. This new, or mill-return, scrap is readily used by the industry in making new semi-fabricated products.

The current economic situation continues to look more difficult for some parts of the secondary copper industry. This segment of the economy seems to be laboring under significant stress, caused in part by changing and more stringent government regulations.

Problems on the horizon include the safe collection and processing of junked electronics equipment and the potential for renewed recycling of radioactive metal from dismantled U.S. nuclear plants. U.S. scrap handlers and processors have been adapting rapidly to handle the increased recycling of electronics scrap. At the same time, however, adequate provision for facilities to handle the relatively small amount of radioactive copper scrap expected from dismantled nuclear facilities remains a problem to be solved in the future. More recently, additional charges to be levied through the carbon capture program associated with the U.S. government’s efforts to curb global warming could deal a severe blow to the industry.

The domestic copper scrap industry faces some difficult times in 2009. Not only can a continuing difficult economic environment be expected as a result of a potentially deepening recession, but the underlying negative factors affecting the industry’s competitiveness also will continue. The sharp drop in copper price, and copper demand, that has occurred since September 2008 is expected to continue through 2009 with little improvement.

Those firms who had paid much higher prices for their scrap early in 2008 will find themselves unable to recoup the investment or pass through the costs. As a result of the lower price, new scrap supplies also will slow. Even so, foreign competition for the scarce supplies can be expected to continue.

Though lower energy costs may exist temporarily, higher taxes, labor costs, unfair trade rules and new environmental costs can be expected to be onerous. Under the notion of changing the planet’s climate, the U.S. government, through either the Clean Air Act or new legislation, has the potential to levy burdensome regulations on the industry for the control of carbon and carbon gas emissions. This might be viewed as the "nail" in the coffin. Without a considerable change in government attitude and the overall economic environment, the outlook for the copper industry is not good.

The full Copper Development Association report, The U.S. Copper-Base Scrap Industry and Its By-Products – 2008, is available at www.copper.org/publications/pub_list/pdf/scrap_report.pdf.

Editor’s Note:

This text is an edited excerpt from the executive summary of the Copper Development Association’s technical report, The U.S. Copper-Base Scrap Industry and Its By-Products – 2008.

SOURCES OF STRESS

COPPER CONSUMPTION

SCRAP SUPPLY

THE SUPPLY SITUATION