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Less Than Rosy

Features - Commodity Focus

The short-term outlook for the red metal is tepid as the recovery of the global economy remains weak.

Dan Sandoval December 7, 2012

Copper scrap markets have been under significant downward pressure during the second half of 2012. Dealers of copper scrap point to many factors for the decline, including general uncertainty in the global economy. As a result, many scrap dealers are bearish about the next several months.


Gone Flat
Copper scrap consumption is driven primarily by China. The country’s economy has grown at double-digit rates through much of the past 10-plus years. More recently, however, China’s economic growth has slowed, particularly in the second half of 2012. While still growing in excess of 7 percent, China’s slower economic growth is affecting a number of commodities, including copper scrap.

In other parts of the world, while opinions are mixed regarding the relative health of the U.S. economy, the consensus seems to be that much of Europe may slip into recession.

With a tepid global economy, the spark that is needed to boost copper scrap markets is missing.

In early November, the copper scrap market hit a rough patch, with prices dropping significantly. “Mills are not taking orders through the end of the year,” one scrap dealer says. “China is not active, as their mills are scaling back.”

A scrap dealer who ships to both domestic and offshore consumers says copper scrap markets likely will remain flat until the end of the first quarter of 2013. “Nothing will happen until March (2013),” he speculates.

All eyes are on China currently, as the country transitions to new political leadership. Given this change, that country’s copper scrap market may not pick up until after the Chinese New Year, which is Feb. 10, 2013.
 


G
iant Consumer
China is the world’s largest consumer of copper, taking in more than half of the world’s copper. This includes copper cathodes as well as copper scrap.

However, the slowdown in the growth of the Chinese economy translates into less construction, less manufacturing and reduced demand for raw materials, including copper and copper scrap, than in previous years.

The Chinese government has initiated a stimulus package designed to return the country to the growth rate it has seen in recent years. The measures China’s new administration takes to strengthen the Chinese economy will go a long way toward setting a medium-term outlook for copper scrap. However, the impact of this stimulus package on copper consumption has not been determined as of yet.

According to a recent article in The Wall Street Journal, inventory of copper cathodes stored at bonded warehouses in China have soared. Judy Zhu, an analyst with London-based Standard Chartered, tells The Wall Street Journal that the copper overhang had grown to about 600,000 metric tons in late summer, up from 500,000 metric tons in June 2012. Zhu and other analysts with Standard Chartered also “project the stockpiles will have since grown due to long-term purchase contracts. By comparison, London Metal Exchange warehouses reported 214,650 tons,” the article states.

The WSJ article adds that new imports of copper products into China have been going straight into storage rather than being shipped to manufacturers, reflecting the overall lack of demand for the metal in that country.

A U.S.-based nonferrous scrap metal exporter says China will likely be a weaker importer of many metals in the coming year, as there will be less construction activity and a general slowdown in the growth of the Chinese economy.

However, some market speculators say they feel copper markets may be poised to strengthen, as the new Chinese government administration could take aggressive steps to improve the country’s slowing economy.

Brian Riley, sales manager for the U.S. division of the large European-based copper producer KME Group, agrees that the market for copper during the next six months will hinge on how China’s economy responds to the government’s stimulus program.


Brought Down

Other factors also have been weighing on copper pricing. Chile has reportedly been exporting more copper concentrates, which are used to produce refined copper. This puts more metal on the market during a time when buying has eased back, at least in the short term.

A U.S.-based distributor of copper products notes that while copper production domestically has steadily declined, it is holding on in Europe.

SEC Mulls J.P. Morgan’s Copper ETF

J.P. Morgan, New York, has been seeking to introduce a copper exchange-traded fund (ETF), known as XF Physical Copper Trust. However, a number of companies are protesting the move.

Opponents of the EFT, including copper fabricating companies such as Southwire Co., Encore Wire Corp., Luvata and Amrod, say its creation could increase market volatility. In a joint complaint, they write that “the launch of these new ETF products—and the supply disruption that it will create—will hurt not only us and the markets we serve, but [also] will have an extremely adverse effect on the U.S. economic recovery.”

Germany-based Aurubis, a major producer and recycler of copper, has strongly opposed the ETF, stating, “about 180,000 tons of copper will most likely have to be collected for it. This would probably lead to significant price effects in light of the LME (London Metal Exchange) copper inventories, which currently amount to 211,000 tons.”

The SEC’s Division of Risk, Strategy and Financial Innovation (RSFI) analyzed the impact a copper ETF would have on copper markets. RSFI released its findings Nov. 6, 2012, and sees no clear evidence of statistical causality between the historical flow of assets to physical metals ETFs and underlying prices and no strong statistical relationship between copper inventories and prices.

Looking at end markets for finished copper, he says that while the transportation sector continues to show decent growth, he questions how long this trend will continue, especially as other key copper-consuming sectors, including power and construction, continue to flag.

According to preliminary indications, the transportation market is starting to slow down. One source says the automakers Toyota, Honda and Mitsubishi all are reporting declining sales in Japan.

Despite this, he sees manufacturing in general strengthening, though the improvement is gradual.

As for power generation, a sector that has been a significant end market for copper, demand may be moderating after a fairly healthy run-up, a source says. Any slowing of this sector could ease demand for copper products as a raw material.

Despite these challenges, for a number of domestic copper producers, the market, while not great, has been strong enough to keep their operations running.


Righter Future
While the market for copper scrap during the next several quarters could be challenging, longer term there is optimism. Eventually, the global economy, including the housing market, will strengthen, which likely will contribute to the firming of the copper market.

Secondly, there appears to be an overall shortage of the metal on the market. According to the Lisbon, Portugal-based International Copper Study Group (ICSG), mine capacity utilization averaged 81 percent from 2008 to 2011 and mine production grew by an average of only 0.9 percent per year. The ICSG’s “2012 Statistical Yearbook” says the low numbers were a result of numerous factors, including lower head grades, labor unrest, technical problems and temporary shutdowns or production cuts.

A report from U.K.-based The World Bureau of Metal Statistics notes that copper markets recorded deficits through the first half of 2012. A deficit of 279,000 tons for the first six months of 2012 follows a 253,000-ton surplus during that same time in 2011.

Meanwhile, copper is becoming more expensive to mine, making copper scrap more attractive. A recent report by Chicago-based Resource Investor, www.resourceinvestor.com, which is affiliated with the Mining Indaba and Hard Assets groups of conferences and managed by the Summit Business Media’s Professional Services Group. Resource Investor notes that the average cost to extract one metric ton of copper in 2000 was $4,000 to $5,000. Currently, it costs roughly $10,000 to extract that same ton of copper. The report notes that the cost to mine copper from older mines will continue to grow, while the cost of constructing new mines, especially in regions of the world that are less politically stable, will add to a potential sharp increase in copper prices.

These factors could positively affect copper scrap demand, and price, in the long term. Despite some issues with grade substitution because of escalating costs, the longer-term outlook for copper scrap benefits from the continued need for the material by key sectors.

 

The author is senior editor of Recycling Today. He can be contacted at dsandoval@gie.net.

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