The value of copper on global exchanges has been volatile but trending upward through much of 2020. Despite COVID-19-related turmoil, several economic trends appear to favor the red metal in the forecasts of economists and analysts.
This carries good news for scrap recyclers and traders but does not always provide comfort when during any given week or month the predicted boom for copper has not seemed to trickle down to bids being made for scrap purchases. The separate issue of China’s attempt to wean itself off imported red metal scrap has been the culprit this year.
Driving around the corner
Copper’s value in future financial quarters and years was a topic of discussion for a panel convened for the Trading Asia event, hosted by Euromoney’s Global Investor Group and conducted online Sept. 17. The discussion included updates on energy and agricultural commodities, but copper also received considerable attention.
When asked by moderator John Browning of Shanghai-based BANDS Financial whether commodities could be headed for another “supercycle” heading out of the COVID-19-related downturn, panelist Saad Rahim of Netherlands-based Trafigura said it was feasible, “with the obvious caveat that it depends on how demand recovers.”
In the metals sector, Rahim cited “an underinvestment on the supply side” as being a factor that could affect pricing in late 2020 and into 2021. Concerning mining, in particular, Rahim said, “We haven’t really seen that reinvestment that is needed going forward.”
He said that was particularly true for metals such as copper and nickel that have a sizable presence in “electric vehicles (EVs) and grid buildout and robotics. All require more copper and nickel in particular.” The demand in those growing markets could be enough to boost prices, especially weighed against the still low levels “of supply that we see committed,” added Rahim, who is Trafigura’s chief economist.
If EV sales return to the growth trend they had before COVID-19, that would be a foremost factor, said Rahim. “An EV requires four to five times more copper than an internal combustion engine vehicle,” he remarked. “The amount of wiring that goes into [an EV makes it] effectively a computer on wheels.”
Considering that, plus a copper-heavy copper infrastructure, and the nickel that goes into EV batteries, “We’re looking for that incentive price to come in [to spur mining projects, or] there is a deficit that starts to emerge” in mined supply, said Rahim. “Stimulus efforts in China and Europe in particular focus on new energy; that is going to be copper intensive,” he added.
Sachin Patel, who works from Singapore for Chicago-based CME Group, described copper’s journey in 2020 from below $2 per pound in the spring to above $3 per pound in September as “amazing.” The price recovery, he said, “seems to have been driven by China itself” on the demand side, along with “some supply difficulty and positioning [issues].”
On the demand side, “China’s Imports for the past two to three months have been a sight to behold,” he commented. Patel said if any additional demand recovery emerges from North America and Europe, it would put considerable upward pressure on the price of copper.
Matthias Rietig of the Japan-based JPX commodity exchange said the commodities market could become even more volatile in the near- and medium-term future. He expressed concern about “all the money that’s been printed, [which] is in a way scary.” Rietig added, “We can be bullish on metals, but it’s going to be quite choppy.”
Moderator Browning expressed enthusiasm for new global trading contracts emerging from China, including one for copper that could come online as soon as October. “We feel it could overtake the current contracts, in time, to be the benchmark [in] trading copper,” he said of the BANDS Financial viewpoint.
Finding the furnaces
Global price support is encouraging, but for scrap recyclers who were accustomed to robust demand from buyers in the People’s Republic of China, that nation’s government has caused a former seller’s market for red metal scrap to shrink considerably.
With China’s economy the first to rebound from COVID-19, that nation’s copper and brass producers have needed metal units from other parts of the world in mid-2020. With a national scrap quota import system in place, Chinese buyers ended up bringing in more cathode.
Government statistics cited by Shanghai Metals Market (SMM) show that in August 2020, red metals producers and other importers brought in 62.8 percent more cathode compared with August 2019.
Year-to-date, the cathode imports have added up to 2.95 million metric tons in the first eight months of 2020, amounting to a 37.7 increase from the same period last year, according to SMM.
Copper scrap imports, along with those of aluminum, paper and ferrous scrap, have been subject to quota restrictions in China in 2020. The 12 batches or sets of quotas issued thus far have fluctuated in volume, seemingly dependent on the health of the overall economy or metals sector.
The government of China has set a goal of prohibiting imported scrap materials from entering the nation at all starting in 2021, although it has received pushback from overseas trade associations such as the Washington-based Institute of Scrap Recycling Industries (ISRI) and, almost certainly, from its own manufacturing sector.
Within China, trade groups led by the China Nonferrous Metals Industry Association’s Recycling Metals Branch (CMRA) have been setting up a system to allow high grades of nonferrous scrap that can meet a set purity level to be imported in 2021 and beyond. These materials are being classified as a “resource” rather than a “waste.” No “scrap” classification appears to exist in the nation’s customs or environmental lexicon.
Just a few years ago, the People’s Republic of China imported record-setting amounts of aluminum, copper, paper and plastic scrap. Trade figures posted to the ISRI website show that in 2017 China imported more than 3.5 million metric tons of copper-bearing scrap. Ten years earlier, in 2007, the nation brought in more than 5.5 million metric tons.
To what extent China’s metals sector is impacted by its nonferrous scrap import barrier next year could depend on the health of its overall economy. As of late August, SMM reports, “Domestic copper consumption weakened in the third quarter, while domestic refinery supply increased month on month. The Yangshan copper premium [an index price tied to imported refined copper at a specific port in South China] kept falling in tepid trading. The liquidity of the whole foreign trade market dropped to a low point.”
An economic down cycle is a circumstance scrap recyclers in North America and Europe can endure as a reason to watch an end market get smaller, as is the increase in China’s own scrap generation. Shutting off a trade flow by government dictate meets with less understanding from the private sector in all corners of the market.