Lingering uncertainty

Features - Commodity Focus // Red Metals

Certain types of red metal scrap have flooded the U.S. market with no clear consuming destination or price.

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September 6, 2018
DeAnne Toto

Generation of and demand for red metal scrap within the United States have remained stable, say industry sources. However, much uncertainty surrounds the export market because of escalating trade tensions between the U.S. and China.

One red metals processor based in the Midwest says China’s tariffs on imports of scrap commodities from the United States, including copper and a number of other nonferrous metals, 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 says.

With the newly enacted tariffs, the processor says he is not aware of many U.S. scrap processors who are trading with China.

The trade tensions are affecting primary copper markets as well, with copper having been on something of a rollercoaster ride this summer in terms of its value on global metal exchange markets The relative strength of the U.S. dollar also has been tugging copper prices downward.

Ups and downs

Copper’s value on global metals exchanges declined steadily in late June and early July, with some analysts indicating investment fund managers have soured on the red metal. A rebound the weekend of July 7-8 seemed to reverse copper’s downward momentum, however, heading into the week of July 9.

In notes accompanying his July 2 Copper Journal Weekly Report, John E. Gross of Long Island, New York-based J.E. Gross & Co. Inc. writes that in a three-week span in mid- and late June, “Copper has fallen 34 cents, or 10 percent, from its recent high.”

A July 4 online article by Andy Home of Reuters says the low price reached by London Metal Exchange (LME) copper occurred in part because “funds have been slashing their exposure to copper.”

Home points to figures collected by Denmark-based Saxo Bank that found such fund managers were net sellers of 19 of the 24 most widely traded commodities in the final week of June. “Tariffs and escalating trade tensions have flipped the investor risk switch to off,” Home writes.

Beyond trade tensions, Home writes that copper has further suffered from skepticism as to the actual growth occurring in China’s economy. In addition to those concerns on the demand side, he says supply remains abundant, with global mined copper output growing by 7 percent in the first quarter of 2018 compared with the previous year.

In notes accompanying his July 5 Copper Journal monthly recap, Gross writes, “June was a tough month [for copper]. The combination of trade tensions and the stronger dollar hit metals pretty hard, and, at this point, there is little on the horizon to suggest things will get better anytime soon.”

However, the LME copper price did rally during the July 7-8 trading period, regaining about $162 per metric ton (7.3 cents per pound) in value over that weekend. Copper on the Shanghai Futures Exchange (SHFE) also rebounded 1.1 percent in value over that weekend and in early Monday morning trading July 9, according to Reuters.

That rally was then followed by three weeks of declines before the price rallied again, though briefly, in mid-August in response to China’s plans to send a delegation to the U.S. later in August for trade talks. This helped to relieve some trade concerns that were dragging down pricing for copper, according to a Bloomberg article dated Aug. 20.

Orders also pointed to stronger demand for the metal. According to Bloomberg, Aug. 20 orders from Singapore and Taiwan to withdraw copper from LME warehouses “climbed the most since 2015. Cancelled warrants increased by 47 percent to 36,050 tons.”

As of the start of the third full week of August, 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 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.”

According to the Bloomberg article, “Copper for three-month delivery rose 1.1 percent to settle at $5,991.50 a metric ton at 5:52 p.m. in London, after trading as high as $6,033.” This was after the metal “fell into a bear market” Aug. 15, closing at a more-than-one-year low.

However, by the end of the week of Aug. 20, those gains were being given back as the trade war between China and the U.S. escalated and the dollar rose in value, according to a news item from Reuters.

Aug. 23, the U.S. and China introduced 25 percent tariffs on $16 billion worth of each other’s goods. China’s tariffs included scrap commodities, such as copper.

The dollar also increased in value during that week following the release of minutes from the U.S. Federal Reserve’s most recent meeting, which suggested the U.S. central bank would further increase interest rates, Reuters reports.

Copper fell 0.67 percent to $5,965 per metric ton on London metal markets in response to the news, Reuters reports. Despite the decline, “China accounts for nearly half of global copper consumption, and prices are near their highest in two years as manufacturers have rushed to buy refined metal to avoid import tariffs,” the article states.

“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.” – a scrap processor based in the Midwest

Effects on global trade

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. tells Brian Taylor of Recycling Today that this may not be a cure-all for China-based processors and scrap consumers.

Lion says binge buying of European scrap may be “more restrained than might be expected,” noting, “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, Lion says. “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 E.U. 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.

In the short-term, Lion says, “There is little doubt that improved spreads for European (as well as Australasian, Middle East and Southeast Asian) red metal scrap to lure material to China in substitution for unavailable U.S. units is [a] probability.”

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 has 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, ISRI notes 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 preshipment inspections and more,” according to the “Nonferrous Beat” e-newsletter.

The recycling industry association cites U.S. CensusBureau 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.”

From a U.S. Perspective

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

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. However, he adds, “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. It is all stuff that no one knows what to do with. Most scrappers don’t have a home for it.”

These grades include No. 2 copper, yellow brass and lower grade No. 2 insulated wire, the processor in the Midwest says. While No. 2 copper and yellow brass are not low-value items, he says they have always been considered export grades.

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.”

He continues, “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.”

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

The Midwest-based source says that while his company has been exporting to China with less frequency, he did have a couple of orders of red metal scrap in transit to China as the tariffs on U.S. scrap were about to go into effect. “Everything I had was honored, but it was a slow-going process,” he adds.

While his company has been trading with countries other than China, the Midwest-based source adds that they are “newer markets and everyone is testing the water, and it’s slow going.”

Within the domestic market “things are extremely stable and well-balanced,” says a processor based in the Northeast. “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 Northeast-based processor has been affected less by the actions out of China because his business was built to supply the North American market with what he describes as “high-quality copper scrap products.” However, he acknowledges being affected by overseas markets, which he says “are certainly quiet” as of last August.

In terms of domestic consuming facility demand, the Northeast-based processor says, “Currently, we are seeing a bit of a slowdown; however, that seems to be the usual summer quite period. In general, our customers report stable business.”

The processor who is based in the Midwest also describes domestic demand for high-grade materials as “steady,” though he adds that deliveries are still being scheduled for a month or two out, which has been the case for the last year at least. “It’s OK as long as scrap is continuing to flow,” he says.

Whether and in what form that flow occurs outside of North America remains to be seen.

The author is editor of Recycling Today and can be contacted at dtoto@gie.net.