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Waiting Game

Features - Commodity Focus

Lower copper prices are strengthening demand, but sellers aren’t settling.

Lisa McKenna May 8, 2013

The copper market appears to be in somewhat of a stalemate in recent weeks. High levels of demand for copper scrap throughout the world have been tempered by lower prices for the commodity, a condition that is presumably leading some traders of the red metal to gather what they can and sit on their supplies rather than sell, in hopes of better pricing in days ahead.

Figures appear to back up traders’ claims of strong demand: The International Copper Study Group (ICSG), in a March 21, 2013, press release on copper, states that world usage of refined copper grew by around 3.1% in 2012, resulting from strong growth in Chinese consumption. However world usage without China declined by slightly more than 2%, the ICSG reported.

Meanwhile, copper prices have fallen. The average LME cash price for March was $7,662.90, down 5% from the February average cash price and reaching a new low for 2013. This compares to the 2012 average low price of $7419.47, reached in June of that year.

Traders and brokers involved in the copper market relate similar accounts of the market. They also see little likelihood of any major changes in the situation, at least in the near term.

Strong Demand
Robert Stein of U.S.-based Alter Trading says it is likely that demand will continue to outstrip supply. “There is not enough material around, anywhere in the world,” he says. Stein also serves as president of the Bureau of International Recycling’s Nonferrous Metals Division.

Stein says the demand for copper scrap continues to be witnessed from China, Europe and the United States. He says the recent heightened inspection process in place at Chinese ports, while not directly affecting most shipments of copper scrap, could add to the market dynamics of doing business there.

“There probably has been an increased observance of what’s coming into the country,” Stein says, adding, “that could serve to make the import of refined metal more favorable than perhaps scrap is.” However Stein stresses, in most cases the heightened inspections apply predominantly to lower grades, and not No. 1 and No. 2 copper products.

Meanwhile, Stein characterizes the supply of copper scrap as tight, and points to the narrowing margins between terminal markets pricing—such as the COMEX (Chicago Mercantile Exchange) or LME (London Metal Exchange)—and discounts for copper scrap. “As the markets go down, in order to attract metal into the cycle, the prices don’t move down as fast as the terminal markets, so the discounts for copper scrap tend to be narrowing,” he says. “If the industrial demand wasn’t there, they wouldn’t narrow.”

He points to arguments by others in the industry that commodity markets are headed downward, and recent signs that the investment community is choosing alternative investments. “If the markets continue to be on the defensive as they have for, let’s say, the last six weeks or so, that only makes it worse,” says Stein.

Stein adds though, the bearish commodities markets don’t indicate there’s any less copper scrap available to the consuming sector. “It just means that it’s not flowing freely,” he says. And Stein says he sees the situation continuing for at least the next couple of months. “My personal thoughts are that there’s no reason to believe that all of a sudden we’ll see an explosion in the availability of scrap.”

He says the situation is also highly related to currency values, particularly the decline in the euro against the U.S. dollar recently. That too has apparently affected the commodity’s appeal as an investment. “There may be better places to put money right now,” says Stein.

As the European market continues to work sluggishly toward a recovery, signs of such a turnaround have been slow in coming. Even so Stein says, copper scrap continues to move to European buyers as well.

“People are taking orders for those quantities of materials that they can realistically replace profitably,” he says.

Stein says there are signs that China’s healthy demand for copper will continue in the near term. “There are some expansion programs in China that would indicate that copper scrap would be more in demand moving forward.” Stein refers to smelter expansions in China that have been reported in recent weeks.

Another factor that could affect the price of copper scrap in the coming months, Stein says, is GDP growth in the United States. “Any kind of a breakdown of that growth would certainly have a negative impact on the flow of scrap and certainly the price,” he says.

Stein says while the current copper market appears to be flat, he is hopeful for better conditions in the second half of the year. It being a cyclical market, he says, the process takes time.

The flat market could also extend to Asia, Stein says. “It may be limited by the supply of material available to them,” says Stein, “so the demand could be there, but not the supply.”

This, he points out, is in fact the more likely scenario for the near term: that the demand will be there, and could even improve, but the ability for the American market to supply it will be difficult.

“I think for the most part it’s just because there’s not enough scrap to make everybody happy right now,” says Stein. And that includes scrap traders as well as consumers, he adds. “It’s tough for those of us who operate scrap yards, and it isn’t unique to copper by any means. It’s evident in aluminium, stainless steel scrap, scrap iron: There just isn’t enough flow of material in the pipeline.”


More Buyers

Meanwhile one scrap broker based in Dubai describes similar conditions in the markets he works in. Anshul Gupta, CEO of Pan Gulf International General Trading LLC, based in Sharjah, U.A.E., runs four facilities and several sales offices located throughout Asia and Dubai. The company specializes in the worldwide trade of stainless steel and copper, along with other metals.

Gupta says he has witnessed what appears to be a copper shortage in Dubai, spurred on by low LME prices of the metal that are attracting more buyers into the market. But, he adds, the outbound cargoes are limited. “The competition has increased a lot,” he notes, “so everyone is paying higher and higher prices and the margins are getting very slim.”

Gupta says the slowdown in sales also has led to slowing scrap collection. “Our suppliers, normally small- and medium-sized yards, they don’t want to sell,” he says. “There’s a good demand because of the price, so we are trying to balance this.”

Like Stein, Gupta says he doesn’t see higher copper prices in the near future. “I don’t see the fundamentals strong for the metal,” he says.

In his view, Gupta says pricing previously was commanded more by fund managers investing in commodities. But recently these investors have taken money out of the commodities markets in favor of different portfolios. “For this reason the market has come down,” he comments.

Gupta also says that demand from China has increased because of the lower pricing. While the tonnage may have increased, he adds, the number of dealers in the market also has increased, causing what Gupta describes as a real competition in the market. “The dealers feel the pinch to fight for each and every penny,” he says. “Gross margins are coming down drastically.”

Because so many competitors are in the market, Gupta says, many of them find themselves competing for the same lots, and the same customers. “The best one wins,” he says, explaining it usually ends up being the trader with the lower cost of funds and who can work on a smaller margin.

Gupta says he has witnessed the competitive landscape escalate each year since he entered the market in 2007. “Gross collection all over the world has increased, production has increased.” he says. “But at the same time, the competition has increased. The number of active players in the market are increasing day by day.”

When the market is down, as it has been, Gupta says, scrap traders tend to wait it out for several weeks if they can. “When they see the market start picking up, they start selling their stuff and replacing it with cheaper stuff.”

However Gupta adds this has not been his company’s strategy. “We always buy and sell,” he says. “Volumes, tonnage-wise, have gone down but we prefer to keep it consistent. We believe in selling on a long-term basis.”

Gupta also sees the cycle continuing for a least the near term, and is expecting prices to rise in the next two to three months. When that happens, he says, volumes will likely increase immediately, because so many sellers apparently will have their stockpiles of copper to sell.

Gupta says he has seen no evidence of a shortage in primary supply. In fact, he says, premiums of copper have even apparently come down, “which shows there is pressure on supply.”

Demand for copper scrap from consumers in Europe, as well as China, has also picked up recently, Gupta says. One factor that makes the Chinese market advantageous for his company, Gupta says, is the large size of the country’s smelting facilities, promoted by government policies hoping to reduce pollution.

“[They] have 20 big smelters so we can easily contact them rather than go to a lot of small ones,” he says.

The large size of the smelters also ensures that volumes are high. Gupta says that orders range from 200 tonnes on the low end up to much larger ones. And he says, it is likely the capacities will increase. “Smelting capacities are shifting from different parts of the world toward Asia,” he says.

As pricing goes down, Gupta notes, margins have become thinner, leading traders and processors to become more competitive if they want to survive. It’s a trend that Gupta believes will continue. He says processors need to control and cut costs while increasing volumes.

 

The author is managing editor of Recycling Today Global Edition and can be reached at lmckenna@gie.net.

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