Copper Tug-of-War Forces Price Drop

In the pricing tug-of-war that’s going on in the copper industry, refined copper has recently made gains over scrap. The reason refineries have the upper hand is that many scrap dealers are refusing to move material at today’s prices which are well below those of six months ago. This past spring, the Comex price for copper took a 25 percent dive, going from $1.30 to less than 90 cents. Margins narrowed, buyers moved toward cathode, and scrap markets suffered.

Predictably, the reaction from scrap dealers has been to hold on to as much of the old, high priced scrap inventory as they can and hope for better days. But there are those in the industry who maintain that a market in the 90-cent range is not historically all that bad. They see horded scrap coming out of the yards late this year or early in 1997, as inventories begin to cost scrap dealers money and the normal ebb-and-flow of business forces dealers to move material.

Add to a declining commodity exchange market the increasing demand for better quality at the receiving end, and there are a lot of forces stretching the rope in a lot of different directions. Items that once were acceptable at the mill no longer are sought, or will be taken at a lower grade. Many manufacturing firms are striving for ISO 9000, 9001 and 9002 certification and they all want the best quality for the price.

In the midst of this tug-of-war, the chief copper trader from the Japanese trading company Sumitomo, Yasuo Hamanaka, was discovered last summer to have hidden more than $1.8 billion in copper losses over 10 years. When the news broke, copper prices plunged from $1.25 to 83 cents a pound.

 "Sumitomo was supporting the market, so the news certainly caused the collapse of the copper market," says Rik Kohn, vice president of the Federal Metal Co., Bedford, Ohio. "But they promptly went back in the 88 to 93 cent range and stayed there for two months." Scrap markets followed the exchanges, leveling out around 90 cents. "The price is very stable," he adds.

Many market observers, like Don Lewon, president of Utah Metals in Salt Lake City, feel it is likely there will be legal prosecutions in the Sumitomo case, and probably convictions as a result of the scandal. "But that won’t make a tinker’s damn of difference in the price of copper," he says, although the rapid price drop did affect many in the industry.

Holding onto material only compounds the problem, says Lewon. "There will be a shortage until the folks who are waiting for the price to spike up are able to dump their metal." But this won’t happen for at least a little while, as scrap dealers have been "spooked" by the Sumitomo situation and are wondering if there is more copper out there waiting to show up, according to Lewon. He feels that much of this uneasiness is unfounded and remains confident that markets will continue to flow.

The situation with Sumitomo has been responsible for keeping speculators out of the market, and that allowed the market to trade in a relatively narrow range through the end of the summer, according to Scott Tauben, account executive for Metalsco, St. Louis. He warns that the crisis point is not yet passed. "Sumitomo has been conspicuously quiet about their positions, and Mr. Hamanaka remains unresolved."

But to put the whole situation in perspective, today’s 90-cent range is where copper should have been if Sumitomo had not been supporting the market, according to Kohn.

In fact, the current market transition to surplus production, not the Sumitomo affair, is what is holding prices down, says Daniel Edelstein, copper commodity specialist for the U.S. Geological Survey, Reston, Va. "Sumitomo kept prices higher than they should have been for a longer time, so they fell harder," he explains. "But there still is an unknown quantity of copper out there that is dampening the market. Six months from now it will be the supply surplus that is influencing price."

In the short term, the price drop is having a profound affect on the copper scrap market, says Jim Wurtsmith, a trader with OmniSource Corp., Ft. Wayne, Ind. "We are tight in all grades of nonferrous scrap and a lot of that scrap will not move," he says.

Both mills and processors are contributing to the problem, according to Wurtsmith. "The mills are justifiably picky, and dealers have a lot of expensive units on hand and don’t want to move them at current price levels," he explains. "A lot of grades have been knocked out of what is acceptable. Processors, including ourselves, have learned to make a better package."

Even if there is strong demand, the supply of scrap is expected to increase, says Wurtsmith. "If demand sags a bit in 1997, the projected increase in supply will drive prices down," he says. "There is resistance at these price spreads for the mills to pay the price for scrap."

The upshot is that a lot of good quality refined material is available and the supply of good quality scrap is tight. As a result, mills are using more copper cathode and ingot.

"I am bearish over the next six months," says Bernie Schilberg, president of Schilberg Integrated Metals, Willamantic, Conn. "I think we could see quite a drop in red metal prices," he says. Schilberg anticipates a further drop of 15 percent to 20 percent. "There is a tightness in #1 and #2 material," he says. "The commodity exchange price will go down, and the differential will continue to be strong."

Others in the industry are reaching for a positive outlook. "People like me in the scrap trade tend to be optimistic – we have to be," says Lewon. While he felt comfortable with prices in the 90-cent range at the end of August, he was a bit concerned that the market hadn’t seen its lows. "We could see the price under 80 cents," he says. "I’d like to see it stay in the 90- cent area. I don’t see any reason why copper should go up over $1."

Lewon says he feels spreads could get even narrower. "It could happen," he argues. "I remember a time when you could get a slight premium for #1 copper to Comex. They hated it, and I can’t blame them." Others see it the other way around.

"Using refined as opposed to scrap should yield a better end product," Wurtsmith says. With current price spreads in the 1- to 2-cent range, there is little cash incentive to look at scrap. Scrap has a shrinkage factor of about one percent, and there is always the quality risk factor. He says that, if spreads widen out to a 5 or 6 cents, consumers will be more interested in scrap.

"This is the tightest spread I’ve seen in relationship to the Comex in a long, long time," agrees Greg Vaughn, general manager of Shine Brothers Corp., Spencer, Iowa. "That tells me that there is very little metal out there. The scrap dealer has to see that price for a while and get used to it before things change. But I doubt prices will go above $1."

"If the market goes up, the spread from Comex to scrap will widen," says Tauben. He traces the chart for copper during the past year: from September 1995 until spring the price bounced between $1.10 and $1.20. Then the Sumitomo crisis hit in mid-May and the market dropped like a rock, bottoming out around 83 cents. Since then, staring in early July, it hovered around 90 cents and remained unusually steady and quiet in that narrow range. "Scrap dealers are interested in higher Comex prices since that brings more scrap out of the woodwork," he says.

But what looked like a rout in late May, when some feared prices were diving for the 70-cent level, has stabilized. "Ninety cent copper is a lot better than 60-cent copper," Tauben says, pointing to the dive the copper market took in 1980 from $1.30 to 60 cents. Following that slump, it took until 1987 for copper to get back more than 80 cents. Scrap dealers, however, still managed to make a living.

"The future will be interesting," Edelstein says. "Among other things, our capacity to use scrap has declined."

He notes the closing of Southwire’s Nassau Recycling in Gaston, S.C., reduced the secondary smelter capacity for brass. While the brass market is strong, mill capacity remains a question. There is a minimum cost for collecting brass and a profit margin has to be added. "Price will have a lot to do with availability," Edelstein notes. "Margins are getting shrunk."

Copper demand, he feels, is fairly strong – stronger than it was in 1995. However, he says, one has to be aware that domestic consumption of copper was up 13 percent in 1994, a substantial jump on top of the 6-percent gain the previous year. Copper recovered from all old and new refined or remelted scrap comprised 38 percent of the total U.S. copper supply and had an equivalent refined value of $3.3 billion.

Refined copper production was in deficit at the end of 1995 and early 1996, according to USGS figures. "We’re seeing the transition to surplus production of cathode," Edelstein explains. "It’s that surplus production that is holding the prices down."

As always, the big unknown in the copper market concerns overseas buying. China recently slowed its purchases of low-grades of copper-containing scrap such as insulated wire as a result of environmental concerns, says Robert Knox, who handles international sales for Markovitz & Fox, San Jose, Calif. The market is not as strong as it was toward the end of 1995 or early in 1996, but demand from Japan for the higher grades of scrap remains good.

The USGS says that scrap, because it is usually a lower-cost alternative to primary metal, will continue to be of great interest to Far Eastern countries as they expand their industries and build infrastructure. Exports of both alloyed and unalloyed scrap rose significantly in 1994, the latest year for complete figures, while imports of copper alloy scrap declined markedly. In 1994, China, Hong Kong, Japan, Korea, Singapore and Taiwan, combined, accounted for 44 percent of unalloyed and 49 percent of alloyed scrap exports. At the same time, exports of unalloyed scrap to Canada rose by more than 70 percent.

However, USGS notes that The Basel Convention, an international agreement on the transboundary movement of hazardous waste, could impede the international flow of copper scrap.

This will be especially important in the brass side of the industry because high-leaded brass scrap is the prime feed material to the ingot-making and foundry industries.

While he agrees China or India could be a factor, Lewon says he doubts India will be buying much copper scrap in the near future.

Back in the U.S., labor problems also could play a short-term role in the price tug-of-war. A strike at the end of August sent copper prices up 5 cents, and other labor actions were threatened.

Overall, while many people remain optimistic about prices in the 90-cent area, the majority of analysts are predicting lower prices for copper in the long run. Many are looking at 80 cents a pound or even lower.

There is a psychological factor at work here, of course. Eventually the market will become used to figures that are under a dollar, and the 90- cent range may start to look fairly attractive. Then, some of the scrap which has been held back will start to move. Mills which have backed away from current spreads will see some profit in returning to scrap. As the tug-of-war continues, the general business of moving material has to survive the current push-pull without leaving anyone in the muddy middle.