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Choppy conditions

Features - Commodity Focus

The slowdown in China’s economy is apparently changing the dynamics of the copper scrap market, perhaps for the long term.

Lisa McKenna April 28, 2014

copper scrapInternational traders and processors of copper and red metals scrap have continued to deal with difficult conditions in 2014 for a variety of reasons. Key among these has been the widely reported slowing of China’s economy.

The world’s No. 1 global consumer of copper, China, accounts for about 40% of world demand, according to the International Copper Study Group, based in Portugal. But, according to published reports, China’s 2013 imports of copper scrap declined by around 10% from the previous year.

Those lower levels of imports are expected to be more reflective of what may be the new norm for copper scrap.

The low price of refined copper on the London Metal Exchange (LME), the COMEX and the Shanghai Metal Exchange is keeping processors’ margins thin. The problem is exacerbated by the fact that high grades of copper scrap continue to be sought by consumers in Europe and the U.S. 

Therefore, recyclers have complained about a profitability squeeze on both sides of the equation, with consumers offering relatively lower amounts for the limited amounts of higher grade scrap available.

Robert Voss, president of the European Metal Trade and Recycling Federation (EUROMETREC) and CEO of the U.K.’s Voss International, says demand from the Far East has been very poor over the first quarter of 2014, resulting from a lack of liquidity combined with an arbitrage situation between the price of copper on the Shanghai Metal Exchange compared with the LME and COMEX.

“The Shanghai market has been generally lower than the LME,” says Voss, “and, therefore, the Chinese buyers can go out and buy locally in the Chinese market.” He says buyers have been able to purchase cathodes for copper and brass production as a less expensive alternative than copper scrap that is priced based upon the international exchanges. “This has led to a lack of demand, generally, putting the Chinese in a negative state at the moment,” says Voss. Furthermore, he says, Chinese consumers are either not producing as much or are trying to find local scrap material. Overall, he observes, demand has been lackluster compared with previous years.

 

 

Voss explains that Chinese consumers traditionally have begun restocking copper supplies soon after the Chinese New Year, which in 2014 began on 31 Jan. However that didn’t appear to happen.

David Chiao, vice president of Atlanta’s Uni-All Group and the Bureau of International Recycling (BIR) ambassador for China and Hong Kong, reasons that a few factors related to the slowdown in China’s purchasing activity are the broader environmental issues as well as a general cleanup in the bureaucratic system in China. He says the issues of anticorruption, pollution and air quality have taken center-stage for the time being.

“The manufacturing sector of China is slowing up quite a bit,” says Chiao, explaining that the country’s fast rate of growth over the past couple of decades has taken its toll. “The environmental side is one of the things they’ve been neglecting in the past 25 years,” he says.

Chiao also refers to worrisome Purchasing Managers’ Index (pmi) figures in recent months. In fact, Reuters reported in February that the flash Markit/HSBC Purchasing Managers’ Index (PMI) fell to a seven-month low of 48.3 in February from January’s final reading of 49.5. A pmi reading below 50 is widely believed to signal a contraction in the economy.

Chiao says unless the country introduces some sort of stimulus programs in the near future, he believes the market will remain sluggish in the coming months.
 

Unusual dynamics

Meanwhile, European processors apparently are taking advantage of the slowdown in Chinese buying to bring more copper scrap into their yards. On that point, Voss says in recent months European demand has been “OK” and has been satisfied by the local supply. However, he adds, sellers still have a difficult market to deal with.

“We’ve got this unusual situation at the moment where supply is down and consumption is also down, so there’s less volume of business floating around,” Voss observes. Because of that, traders and merchants are having to cut their margins dramatically in an attempt to keep up volumes, he adds.

Voss says less scrap is being generated on account of lower production levels as well as slower replacement patterns. “Supply is down and demand is down, so the thing that suffers in the middle is margin,” he explains.

“Recyclers are very worried about what’s happening in China,” says Marc Natan, a member of the board of directors of Metallum Holding S.A., based in Luxembourg. Its Belgium-based smelting and refining company, Metallo-Chimique N.V., is one of Europe’s largest copper smelters.

Natan, a past president of the BIR’s nonferrous division and current ambassador to Algeria and French-speaking North African countries, also is president of the international trading company Manco in France.

Natan says the decision by China’s government to control the quality of imported scrap via Operation Green Fence combined with a lack of money by consumers in China have led to more claims. He says weak copper prices on the LME have resulted from the weaker Chinese demand as well as from the sluggish worldwide economy.

“Domestic copper scrap will be more and more important in China,” says Natan. For that reason the flow of copper scrap to China will be lower, and it will be higher to buyers in the U.S. and Europe than it has been in recent years.

One hopeful sign on the horizon, says Voss, is the implementation of recent rebates on the value added tax paid on imported scrap into China, which he says should help. But a more important factor, Voss says, is the state of the Chinese economy going forward as well as the country’s domestic demand for copper scrap. If that increases, he says, “demand for scrap and prices should start to kick up.”

The question of whether copper inventories in China are low or high at the present time is one that remains unclear.

On the more positive side, Voss says he believes Chinese demand will pick up gradually as the year goes on, in part because copper stocks in Europe and across the world appear to be relatively low. Furthermore, says Voss, consumers are not stocking material now as they used to. “I think stocks are relatively low at the moment, and if demand picks up, whether domestic or international, then the demand for copper scrap will also increase.”

Meanwhile Natan offers the view that Chinese copper stocks continue to be high, and that the market will be in a surplus situation this year with regard to copper mine production.
 

Slimmer margins

Another concern to European processors is the slim margins they have had to contend with. Natan also says not much high quality scrap is available to consumers in Europe and the U.S. and its price is still high compared with the COMEX price. For example, the price of copper scrap with 94% copper content has been nearly flat with the price of refined copper.

“Nobody is really making money now with the level of price,” says Natan, adding that consumers and recyclers aren’t likely to see significantly more scrap available until 2015.

Natan also says he believes it may take a few months for larger discounts to be applied. “That would help with margins,” he says. “Everyone in the copper industry needs to make money.”

Natan says there is demand for the lower grades but there is also plenty of material available, since some consumers, including some Chinese consumers, can’t readily use this material.

In fact, Natan says, Chinese consumers would prefer to use copper cathode instead of copper scrap. The fact that Chinese consumers continue to face pollution controls is another growing factor, he adds.

Another issue is dramatically rising labor costs in China, Voss points out. “Anything that needs manual separation or labor-intensive separation is not going to be quite so attractive in the future.”
 

A new normal

Long-term, Natan says he believes that demand for copper scrap in China will never again reach the levels it had in the past decade. “They are producing more and more scrap,” he says. “They will need less and less copper scrap.” And, Natan contends, “They will be self-sufficient within 10 years.”

At the same time, Natan says demand for copper scrap throughout Europe should be relatively healthy in the coming months.

“For me, the golden age of China for copper scrap is over,” says Natan. “I believe the demand in the U.S. and Europe will be more attractive.” Natan also says he believes that for financial reasons, consumers in China will be less inclined to offer advanced payments for copper scrap.

“China is changing,” he says. “They will control more of the quality and prices.” And he says, though Chinese buyers likely will return to the market, “it will not be where it was before.”

Meanwhile, copper scrap will find buyers. “The growth in Europe is improving, so demand for copper products is better, and the need for copper scrap is huge,” he says.

Natan describes the U.S. as the next main market for copper scrap going forward. “The industry will be looking to approach the American market to increase their needs.”

 


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

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