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Features - Commodity Focus // Copper

Copper scrap markets finally might be on solid ground, though price volatility likely will continue.

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February 8, 2017
Dan Sandoval
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Following several years of sluggish copper markets, 2017 might finally be when a long-expected recovery takes hold, according to scrap dealers, copper producers and other industry observers. While the prevailing mood of the market is positive, enough questions and uncertainty remain for all but the most bullish prognosticators to hedge their upbeat sentiments.

Despite this agreement that 2017 will be a year of recovery, copper pricing might still be volatile, though most sources say it is highly unlikely that prices will fall as low as they did in early 2016. Sources caution that the potential for any number of “black swan” events, including the new presidential administration in the United States, could change the outlook for copper radically.

Presently, copper is benefitting from positive trends. Since the fourth quarter of 2016, copper prices have shown strong upward movement, though they seem to have backed down a bit toward the middle of January 2017. This retrenching, however, is not causing much concern, according to sources, though several analysts are cautioning that in the near term a further price correction could occur.

Will Adams, head of research at Fast Markets, a U.K.-based metals research firm, says copper has been on a pronounced upswing since the fourth quarter of 2016. The improvement has pushed copper prices “quite high,” he says. However, “By early January prices have run ahead of the fundamentals, and there could be a reality check,” he adds. “We should know in the next few weeks.”

China’s influence

Although prices could decline further, Adams says he is moderately bullish regarding the next several quarters. One factor that buoys his optimism is the fact that China’s economy “is beginning to turn the corner,” he says.

A prolonged recovery of copper is dependent on a healthy Chinese economy. And, while the Chinese government has targeted 6.5 percent growth as part of its newest five-year plan, it also is looking to reduce the speculative bubble that has swelled in many parts of China’s economy (notably the real estate sector) and is cracking down on corruption.

Despite the challenges, several investment and banking houses have gone from being market bears to being bullish on copper. Goldman Sachs, for one, held one of the more pessimistic outlooks for copper through most of 2016. Recently, however, the company’s analysts have adopted a more favorable outlook.

In commentary released in December 2016, Goldman Sachs analysts write that “stronger fundamental developments ... contributed to this surge in speculative interest and are likely to underpin a more bullish environment for copper.”

The improvement, Goldman Sachs’ analysts continue, shows that demand is stronger than expected and should be able to handle the supply of copper on the market. In its analysis, Goldman Sachs also reversed its earlier supply outlook from a surplus of 360,000 metric tons to a deficit of 180,000 metric tons. Reportedly, the decisive factor in this reversal was China’s copper demand, which appears to be higher than originally estimated.

For several scrap dealers, a modestly improved market and higher prices, which on the one hand are welcome, also signal a need for caution.

“While I hate to turn away material, I must be careful with the higher prices,” one large U.S. copper scrap buyer says. “I do feel better about the (economic) environment. Although with these higher prices, I need to see the demand match prices.”

He continues, “I am cautiously buying, although I am watching my cash.”

The copper buyer says he is seeing improved buying from consumers, notably in the plumbing and construction sectors, but the buying isn’t consistent across all sectors. “It seems to be more of a company-by-company basis [as far as] who is doing well.”

However, he adds that generation of copper production scrap is improving.

A copper scrap exporter also sees some reason for optimism in 2017, though he says he sees plenty of headwinds over the next several months, especially out of China.

One nonferrous scrap exporter says the Chinese government has undertaken an extensive environmental review of all manufacturing operations in the country. The exporter questions whether some copper scrap consumers will be able to meet the more stringent environmental criteria introduced by the government and if they will remain closed after Chinese New Year.

He notes that a large percentage of the problem manufacturing plants are in the southern part of China.

Longer term, the exporter speculates that the environmental review could be positive, as it could lead to the building of new capacity that is designed with the proper environmental safeguards. However, for the short term, the change could result in a drop in the number of buyers of copper scrap in China.

Adams agrees, saying the policy is a multiyear approach by China’s central government to grapple with the extreme pollution of the past several years.

China remains the largest consumer of copper and copper scrap (accounting for roughly 45 percent of world demand). The country is reporting stronger economic figures, which are reflected in an uptick in copper demand over the final quarter of 2016.

Supporting this notion of an improving Chinese economy, the Caixin Purchasing Managers’ Index, which is a private gauge of nationwide factory activity in the country, reached 51.9 in December 2016, its highest level in nearly three years.

The improvement in the purchasing managers’ index was joined by an increase in retail sales, which grew by nearly 11 percent in November, while industrial production in China increased by 6.2 percent, topping previous expectations.

The relative health of the Chinese economy will drive copper and copper scrap markets in 2017. The improved outlook that was on display toward the end of 2016 was because of the increase in apparent demand from Chinese sources, according to the International Copper Study Group (ICSG), Lisbon, Portugal.

In its report for the third quarter, the ICSG notes that Chinese apparent demand for copper increased by roughly 7 percent over the first nine months of 2016 based on a 2 percent increase in net imports of refined copper and 7 percent growth in refined production.

Adding to the more positive outlook for China, the most recent data released by the Chinese General Administration of Customs show the country imported 49 million tons of unwrought copper and copper materials in December 2016, close to a 30 percent increase from the prior month.

While China’s thirst for copper picked up, global demand outside the country was unchanged in 2016, ICSG says.

Finding balance

The oversupply of copper, one of the big factors for the slump in prices over the past several years, appears to be easing.

*Average monthly settlement price, cash buyer, U.S. dollars per metric ton; Source: London Metal Exchange, www.lme.com.

On the production side, the ICSG reports a deficit of 15,000 metric tons of refined copper in September 2016, which followed a surplus of 156,000 metric tons the prior month.

Supporting the optimistic view of copper markets in the near term is Germany-based Aurubis, one of the largest copper scrap consumers in the world and perhaps the largest in Europe. Aurubis says copper, which lagged other nonferrous metals for a long time, rallied toward the end of 2016.

However, the company adds in its online “Copper Mail” bulletin, “It seems unlikely that the turbulence on the global markets will decrease in 2017. Instead, political influences should be expected to intensify, increasing risks at the same time.”

Aurubis continues, “There are definitely hopeful developments as well. Economic indicators are pointing upward around the world, with few exceptions, and the emerging markets in particular are benefiting from higher commodity prices.”

Despite its cautionary tone, Aurubis says the global market is deficient in copper, while demand for the metal increased by 3 percent. Global copper production showed a deficit of 84,000 metric tons, while demand increased by 565,000 metric tons, Aurubis’ “Copper Mail” notes.

Meanwhile, the supply of copper on the market should be stable, according to the ICSG. In a forecast made in late 2016, ICSG says that while output from current operating mines, especially in China, will pick up, that growth will be offset by a 6 percent decline in global production and a lack of new major mine products.

In Europe, the copper scrap market also has seen a bit of a dip recently. Aurubis says the European copper scrap market was indicating good supply in December, though activity subsided gradually because of a combination of copper price declines and the holidays. “The good physical and contractual supply situation among scrap processors in Europe, who distanced themselves from deliveries at short notice in day-to-day business, contributed to the situation,” Aurubis writes.

Influencing factors

With attention toward the supply of copper on the market, several issues might shift the market outlook. In a surprise move, the Indonesian government has announced it will end its ban on exporting nickel ore and bauxite, which was enacted in 2014, and will extend a temporary deal to export copper concentrate, according to an article in the Financial Times. However, it might take several weeks to free up the flow of copper from Indonesia.

While Indonesia’s move could increase the global supply of mined copper, a number of potential labor issues could work counter to that. Adams says this year could have more potential supply disruptions compared with historical standards.

Along with potential disruptions, very little in the way of new mining capacity is coming online, which should constrain the supply of new copper.

Prior to officially taking office, U.S. President Donald Trump called for massive investment in infrastructure—as much as $1 trillion over the next 10 years. These projects would require a significant amount of copper, helping to increase copper prices.

On the topic of Trump, one copper scrap dealer says, while he is in favor of a presidential administration that eases onerous regulatory policies that can make it difficult for his firm to remain in business, he worries that some of Trump’s “protectionist” trade policies could have a negative impact. “We are in favor of free and fair trade,” he says. “If the United States and a country such as China get into a trade war, markets could be adversely impacted.”

The author is senior editor with Recycling Today and can be contacted via email at dsandoval@gie.net.