Copper’s winding road

Recycling activity seldom acts as the primary influence on the price of copper on global exchanges, but in 2018 scrap trade barriers put in place by China have had a profound effect on the spread between exchange pricing and scrap pricing.

The economy of China, the world’s leading producer and consumer of copper, does act as a leading influence on copper’s exchange pricing, providing a second reason why headlines from that nation are of interest to red metal scrap recyclers around the world.

Economies in North America and most of Europe have hummed along this year, helping keep copper and brass scrap generation healthy. Recyclers enter the fourth quarter of 2018 hoping economic stability in their own market regions can put red metal scrap supply and demand in balance no matter what happens in China.

Rules and regulations

China’s scrap trade barriers brought a first layer of difficulty to red metal scrap exporters in Europe and North America in 2017 and 2018. For American recyclers, a second layer of difficulty has been added by a trade dispute between the United States and China.

In mid-August, China’s plans to send a delegation to the U.S. later that month for trade talks brought temporary relief to those trade concerns, which had been pulling down pricing for copper.

Thus, by Aug. 20, copper pricing rebounded from three weeks of declines as trade tensions softened and orders pointed to stronger demand for the red metal. The potential breakthrough caused London Metal Exchange (LME) customers in places like Singapore and Taiwan to withdraw copper from warehouses in volumes not seen since 2015.

At that same time, industrial metals in general were buoyed by an increase in the yuan and by an improved outlook for China’s economy. Ole Hansen, head of commodity strategy at Denmark-based Saxo Bank A/S told Bloomberg, “Dollar strength drove the recent sell-off, and with those gains now moderating, industrial metals have managed to catch a bid.”

Immediately prior to that stretch, the price of copper began drifting downward on Aug. 15, closing at a more-than-one-year low, according to Bloomberg. The relative strength of the U.S. dollar also has been one more factor tugging copper prices downward.

Subsequently, although trade tensions between the U.S. and China have only increased, by Sept. 19 copper prices were managing to rise again. An online report the next day from the Australia-based Financial Review that on Sept. 19 copper had slumped and then rebounded in the three weeks leading to that date.

The article said the rebound was “boosted by a weaker U.S. dollar after a new round of U.S.-China trade tariffs proved not as costly as expected.”

LME copper pricing, which reached a temporary low on Aug. 29 of $6,065 per metric ton ($2.75 per pound), closed on Sept. 19 at $6,121 per metric ton (nearly $2.78 per pound).

“In some ways the bad news had been priced into the markets and, if anything, the news on trade had been slightly less severe than we had thought it would be,” the Financial Review quoted London-based Capital Economics analyst Caroline Bain as saying.

Lingering uncertainty

As trade tensions linger between the United States and China, so too does uncertainty for scrap recyclers in the U.S. who handle brass scrap. This century, brass scrap generated in the U.S. has largely been shipped to Asia, and often to China.

One red metals processor based in the Midwestern U.S. says China’s tariffs on imports of red metal scrap from the U.S., which went into effect Aug. 23, have amplified the uncertainty already characterizing copper and brass scrap trade with China. “Uncertainty makes any business environment tough,” he told Recycling Today in August.

Once those tariffs went into place, the processor says he is not aware of many U.S. scrap processors who were still trading with China. “There are a lot of items right now that fellow competitors are not buying because no one knows where to send it or what to pay for it,” he comments.

The Institute of Scrap Recycling Industries (ISRI), Washington, responded to news of China’s tariffs on U.S. scrap imports by saying that its contacts in China were reporting “consternation among Chinese consumers of U.S. scrap commodities.”

According to the statement from ISRI, “Although these tariffs will not be levied on imports from other countries, it is our understanding that other regions may not be able to fulfill all of China’s demand. This is in line with other reports that the trade war has had an impact on the Chinese economy across many sectors.”

Some buyers for Chinese firms have acknowledged shifting their attention to the European and Australian scrap markets to avoid the additional tariffs.

Hong Kong-based scrap trader Michael Lion of Everwell Resources Ltd. told Recycling Today in August that binge buying of European scrap may be “more restrained than might be expected.” Remarked Lion, “There remains the specter of environmental and quality issues as a distinct inhibitor to shipments to China [from Europe].”

In some European nations, protectionism also could kick in, said Lion. “In the event of significant red metal units being drawn away from European consumers, this may encourage greater efforts (always a background factor even before this) to urge restraint by the EU [European Union] authorities.” Efforts to restrict scrap exports might be “under the guise of environmental grounds, though in reality motivated by the consumers for commercial reasons,” he adds.

For scrap sellers and buyers, Lion says, “The situation is, as I’ve long expressed, highly disruptive and a potentially constantly unpredictably shifting scenario.”

Disruption already had been seen in terms of U.S. trade with China. Compared with the first half of 2017, U.S. scrap commodity shipments to mainland China in the first half of 2018 declined by more than 3 million metric tons to 4.8 million metric tons. This represents more than $670 million in export sales lost, ISRI noted in its “Nonferrous Beat” e-newsletter dated Aug. 16.

“U.S. exports of nonferrous scrap metal have been adversely impacted by the full range of Chinese trade measures, including import tariffs, tighter ‘carried waste’ thresholds, restricted and inconsistent pre-shipment inspections and more,” according to the “Nonferrous Beat” e-newsletter.

The recycling industry association cites U.S. Census Bureau trade data that reveal U.S. exports of copper and copper alloy scrap to mainland China declined by 40,000 metric tons in June 2018 compared with June 2017. “For the first six months of 2018, U.S. copper scrap exports to China declined 38 percent by volume year on year to just under 215,000 metric tons,” ISRI notes.

In its statement regarding China’s late-August tariffs on scrap commodities, the association concludes, “There is no doubt that these tariffs will impair the already diminishing scrap exports from the United States to China.”

The changes that have resulted from China’s scrap import restrictions and higher quality standards mean more red metal scrap has been available within the U.S. market, the processor based in the Midwest says. These grades include No. 2 copper, yellow brass and lower grade No. 2 insulated wire.

Regarding these traditional red metal export grades, the Midwest-based source says, “Knowing where to go with that and the spread on that is a big question. It is an unfortunate time right now where there is metal to be purchased but no home for it. There is no precedent for this.”

The same recycler, in an attempt at hopefulness, adds that the scrap industry has overcome other difficult market conditions and likely will weather this situation.

A scrap recycler in the U.S. says regarding the domestic market for red metals, “Things are extremely stable and well-balanced. Volumes are lower than we want and have been for quite some time, but we are basically in balance and able to buy what we need to take care of customer demands.”

The Midwest-based recycler says his company has been trading with countries other than China, but these are “newer markets, and everyone is testing the water and it’s slow going.”

Whether and in what form shipments from North America and Europe of red metal scrap to Asia will take place will be one of the critical circumstances to be monitored in the fourth quarter.