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Losing its Luster

Features - Commodity Focus

The value of copper has been drifting downward for nearly two years, and forecasters are not predicting a dramatic rebound in 2014.

Brian Taylor December 5, 2013

For much of the 21st century, the copper and brass scrap business has been a great sector in which to work. Buyers in China could not get enough red metal scrap to satisfy the nation’s burgeoning copper production plants, and sellers in the U.S. were happy to supply what they could.

The fourth quarter of 2008 proved to be an obvious exception, but traders who survived the turmoil of renegotiated and cancelled shipments began to work their way back up from that trough throughout most of 2009 and 2010.

Since early 2011, however, the value of copper and copper scrap has been on the decline, as measured by Comex and London Metal Exchange (LME) contract pricing.

In 2013, the thriving trade of red metal scrap moving from the U.S. to China has slowed by 9 percent compared with the year before, based on figures for the first half of the year collected by U.S. government agencies.

As recycling company owners and managers prepare budgets and forecasts for 2014, among the larger questions they will try to answer is whether copper’s slowdown will continue along the same arc or whether a new year brings with it possibilities of a rebound.
 

Building Slowly

The production of copper and brass in the United States in 2013 is on track for another disappointing year of slow recovery from the subprime mortgage crisis of 2007 and 2008.

Production at brass mills in the United States has, depending on one’s point of view, either held steady or stagnated from 2011 to 2013. Brass mills make up the largest domestic consuming market for copper-bearing scrap in the U.S.

Figures collected and published by the U.S. Geological Survey (USGS), Reston, Va., show American brass mills as having shipped 951,000 metric tons of product in 2011 and 953,000 metric tons in 2012.

In the first six months of 2013, brass mills in the U.S. shipped 479,000 metric tons of semifinished or finished products, putting the sector on pace to produce 958,000 metric tons for the year.

The USGS estimates that domestic brass mills consumed some 615,000 tons of copper-bearing scrap in 2012 and in 2011, a total that is likely to be matched in 2013. This level of demand is stable but down significantly from the peak figure of 896,000 metric tons in 2000 or even the 710,000 metric tons consumed in 2007.

Between 2000 and 2007, scrap dealers had a growing offshore market in China that absorbed much of that tonnage. In recent years, however, the muted demand from brass mills is matched by a lack of generated red metal scrap.

Rik Kohn of brass ingot maker Federal Metal Co., Bedford, Ohio, says 2013 has been characterized by “soft demand [for ingots] and limited scrap availability, so we have been squeezed on both ends.”

Kohn and other buyers for Federal Metal are confronted with the additional task of seeking lead-free copper scrap to create ingots that will ultimately serve the plumbing sector. (See sidebar “Unleaded, Please” below.)

For ingot makers or brass mills to be able to consume more red metal scrap, the U.S. construction industry will have to enjoy the type of strong rebound that continues to be evasive.

Metals industry analyst Edward Meir of INTL FC Stone, Stamford, Conn., says that while the housing sector has enjoyed a modest comeback, even this slight rebound may not be able to withstand the Federal Reserve backing away from its bond buying activities.

Unleaded, Please

The nonferrous secondary ingot industry in North America in the past 50 years has declined from more than 100 such companies to fewer than a dozen that are operating today.

Producers of brass and bronze ingots that ultimately become plumbing products have been taking part in a shift away from leaded alloys to unleaded ones.

Federal Metal Co., Bedford, Ohio, has been producing and marketing lead-free ingots since 1993, well ahead of government mandates to curtail the use of lead in this application.

According to the company’s Rik Kohn, 2014 is the year when lead-free ingots will no longer be an option but instead will be the only product allowed for use in plumbing applications.

In 2013, this has increasingly meant that red metal scrap that contains lead has to be avoided by these purchasers at the same time that they scramble to seek out lead-free scrap sources.

“Recently, the price of leaded scrap has dropped,” says Kohn in late October. “The Chinese have not been aggressive, and there are more such units on the market than there is demand. A part of the reason is the dramatic switch to lead-free for the potable water industry to comply with the 2011 law,” referring to the Reduction of Lead in Drinking Water Act, which takes effect Jan. 4, 2014.

That law states that if a pipe, fixture or other component of the potable water system touches water, it has to be 99.75 percent lead free.

For an ingot maker like Federal Metal that serves the potable water industry, it has made 2013 a challenging year to buy scrap. “Clean, lead-free scrap is very tight,” Kohn comments. “It has been all year.”

With just a couple of months to go before the deadline, Kohn says makers of products and alloys that serve the potable water sector are still determining which specific chemistries they will use. Some producers, he says, are using bismuth alloys, others silicon alloys and yet others are “experimenting with sulfur alloys . . . everyone has an opinion.”

If or when the industry settles on a standard, Kohn says, this may result in “more scrap in the stream” as buyers become more certain about what they need to procure.

“Once the tightening [in U.S. Federal Reserve bond buying] starts in earnest, some sectors will suffer more than others,” says Meir. “Housing could be one casualty, since already it is seeing some signs of cooling in the wake of rising rates,” he continues.

Without the revival of a newly robust construction sector, it seems unlikely that domestic copper and brass producers will see increased orders or that a greater volume of red metal scrap will flow into U.S. scrap facilities.

A nonferrous scrap broker and exporter based in Southern California describes 2013 as a year of thinner profit margins. He says his company’s volumes will hold steady at best as opposed to experiencing any increase.

China’s Operation Green Fence has affected the health of his business by making some grades, such as zorba fines and mixed motors, harder to market, he says. The bigger consistent drain on profits, however, has been the increased drayage costs and slower payments resulting from the clogs and backups at Chinese ports as inspectors from China Customs and other agencies scrutinize each shipment and bill of lading.

Whether it was the degree of difficulty of dealing with Green Fence, a cooling down of China’s metal production industry or a combination of the two, U.S.-based scrap processors and brokers will send less red metal scrap to China in 2013 than they did in 2012.
 

Big Questions

Throughout the 21st century, China has been the hot destination for red metal scrap. China’s copper and brass production has soared as its economy has grown, its population has urbanized and its utility and transportation infrastructure has rapidly expanded.

Since 2000, buyers representing Chinese copper and brass producers have combed the United States seeking red metal scrap, generally offering prices and payment conditions that made China the destination of choice.

The first half of 2013 marked a rare retreat from this trade pattern. According to the USGS, copper-bearing scrap shipments from the U.S. to China totaled 405,000 metric tons in the first six months of 2013. That total is down 9 percent from the 447,000 metric tons shipped in the first half of 2012.

When forecasting global copper production, demand, pricing or scrap consumption, China has put itself into position to be considered first.

As 2013 draws to a close, several things occurring in China likely will affect both global production figures and pricing for copper in 2014, says Meir. “What concerns us most going into 2014 is that we do not think the markets have fully discounted a further slowing in the Chinese economy, perhaps because recent statistics have turned more positive,” he says.

In November, China’s Central Committee will be making crucial decisions regarding the extent of economic reforms it wishes to introduce in 2014. “If the government achieves even a modest amount of what it intends to do, we think the impact on metals demand will be noticeable,” says Meir.

“Consolidating, merging or even closing excess or unwanted capacity in such sectors as steel and aluminum, along with a host of other industries, will, by definition, mean reduced demand for raw materials, energy and labor,” he continues. “Writing off bad loans should have the same effect. In addition, the economy still has to get through a real estate bubble in one piece.”

In Meir’s estimation, the state subsidization of large banks and state-owned metal producers will have to be scaled back at some point, which will cause short-term pain before it can provide long-term benefits.

More so than the copper or brass industry, the steel industry has historically been heavily subsidized by all levels of government in China, creating steel producers will balance sheets that would not withstand a more open market.

“The Chinese city of Tangshan illustrates the debt binge run amok,” says Meir, referring to a city of 7.5 million people located about 100 miles from Beijing. “The city has 156 steel blast furnaces compared to a total of just 32 in the United States, Canada and Mexico combined,” says Meir.

“The government plans to cut 60 million tons of steel capacity in Tangshan by 2017 (mainly for environmental reasons), and we suspect that these will be the kinds of retrenchments (and loan write-offs) that will be unfolding over much of China in 2014,” Meir says. He adds that this is “not exactly a resounding endorsement for higher growth or stronger metal demand.”

The copper and brass industries in China are not believed to be suffering from the same extent of overcapacity as the country’s steel industry, but government statements have consistently advocated for shutting down mills and smelters thought to be outdated or heavy polluters.
 

Settling on a Number

As of late October, the cash settlement price of copper on the LME had fallen more than 8 percent from where it stood Jan. 1, 2013.

The World Bank forecasts that copper’s price will average out at $7,100 per metric ton ($3.22 per pound) in 2013. The organization sees copper’s value falling only slightly in both 2014 and 2015, with forecasts of $7,050 per metric ton ($3.20 per pound) in 2014 and $7,000 ($3.17 per pound) in 2015.

Meir of INTL FC Stone sees a slightly higher average price of $7,200 per metric ton ($3.37 per pound) in 2014 and also sees volatility as part of the picture along the way. His forecast calls for copper to at some time in 2014 be worth as much as $8,250 per metric ton ($3.74 per pound) on the LME and for it also to sink down to $6,300 per metric ton ($2.86 per pound) at its lowest point.

“Just like [2013], 2014 will be another range-bound affair, made all the more so by the fact that the Chinese growth juggernaut will likely show even more signs of slowing, while producers are, as of now, still moving too slowly to take excess capacity off the markets,” Meir says.

“We suspect that should our 2014 lows be reached, producers will initiate cutbacks across a number of metal complexes with more urgency, potentially setting the stage up for a rather respectable move higher going into 2015 and 2016,” he predicts.

 

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

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