Following the Leader

The drumbeat in demand from China as it seeks to develop its infrastructure has helped propel copper markets to higher planes. While several other metal commodities have dipped back from their earlier highs, through the first half of this year copper has climbed steadily upward.

END MARKETS. End markets for copper include: building construction, 48 percent; electrical and electronic products, 21 percent; consumer and general products, 11 percent; industrial machinery and equipment, 10 percent; and transportation equipment, 10 percent.

Although smaller in total tonnage than the electrical and electronics uses, copper is used in brake linings and bands, bushings, instruments and filters in the automotive and aerospace industries and for various chemical and medical purposes.

Signals are mixed in the domestic industry, with copper producers like Asarco and Phelps Dodge enjoying strong demand, while some smelters face tough markets as they compete for raw material with China.

UNFAIR COMPETITION? Highlighting the growing presence of offshore markets in the copper scrap market, a recently released report by the Copper Development Association (CDA), New York, shows that domestic consumption of copper scrap in 1980 amounted to 613,000 tons. However, by 2003, that total declined to 206,000 tons, despite large gains in overall copper consumption that occurred during the same period.

Declining domestic copper scrap consumption resulted in two organizations filing petitions in 2004 to restrict export of the material. The Copper and Brass Fabricators Council and the Non-Ferrous Founders’ Society, along with members of the organizations, called on the U.S. Commerce Department to cap copper exports to China. The groups claimed that China had used a number of questionable methods to keep copper scrap flowing into the country, resulting in less copper scrap for U.S. domestic consumers.

However, the Commerce Department ultimately ruled against the domestic copper producers.

Stan Shanker, president of Warrenton Copper, a Missouri-based copper smelter, says the number of domestic copper scrap-melting facilities has been declining steadily during the past 10 years, unlike the growing number of copper smelters and scrap consumers overseas, especially in China.

David Waite, the founder of Commodity Risk Management Associates, a New Jersey company that provides advice on commodity price risk, says, "China is eating everyone’s lunch."

While China has been the dominant player in the copper market, Waite says U.S. demand has been stronger during the past several quarters thanks to the strength of the housing industry.

THE HUNGER. According to a report by the CDA, "Refined copper consumption in the United States increased about 10.4 percent between 1994 and 2000 to about 3 million tons. U.S. refined consumption decreased to around 2.3 million tons by 2003, but recovered modestly to around 2.5 million tons last year."

During the same period, world copper consumption increased nearly 42 percent to more than 16 million tons.

China, having consumed an estimated 22 percent of the copper recovered worldwide from scrap in 2004, has become the largest copper scrap-consuming nation in the world.

Despite higher secondary exports and lower domestic copper consumption, the United States remained a leading consumer of copper-based scrap, with 18 percent of the world’s total last year. In 2004, the United States consumed about 3.2 million tons of copper, including nearly 968,000 tons from refined and direct-melt scrap.

The CDA report, published late last year, also noted that world trade in copper-based scrap increased nearly 353 percent from 1989 to 2004, largely in response to the increased industrial growth in the Far East and in Europe.

Asia and Middle Eastern countries received about 74 percent of world copper scrap last year.

Meanwhile, the United States continues to be the largest exporter of copper scrap, exporting 19.3 percent of the world’s total copper-based scrap in 2003.

This swing in the copper scrapmarket offers mixed news for domestic companies. Mining concerns, such as Asarco, Rio Tinto and Kennecott Copper are ramping up mining capabilities to bring more copper to the market, but demand continues to outpace supply. Even with a significant amount of new capacity already on the market, copper is still in an accute shortage.

Shanker says with the situation as it is and with China in the role of the major player in the world market, "things are tenuous." He says tubing and fitting makers are having a tough time. "The direction of the government and China are tough for manufacturers," he says, adding that domestic companies must also contend with environmental regulations and various compliance costs that make it difficult to compete with China.

Another factor that makes shipping scrap to China more beneficial is the favorable freight rates. Shanker says he can ship from St. Louis to Chinese port for $1,200. Meanwhile, he says he can’t ship from St. Louis to New York for less than $1,800.

While press reports have stated that the Chinese government has attempted to slow down its vigorous economy, more recent figures show that demand for copper by Chinese interests remains robust. According to some reports, Chinese industrial production increased by 16 percent in April compared to the same time last year. The increase follows a 15 percent increase in March, according to the China-based National Bureau of Statistics.

The push to buy copper is partly driven by a supply shortage that has kept inventories low. A report earlier this year from the International Copper Study Group, based in Lisbon, Portugal, forecasts a global shortfall of around 259,000 metric tons this year and 93,000 tons next year.

Because of difficulties domestic copper consuming companies faced in light of strong buying from China, several consumers filed a short supply petition under the Export Administration Act last spring, requesting monitors and controls be placed on the export of copper-based scrap. The U.S. government denied the request.

While domestic copper scrap consumers said the steady loss of domestic copper scrap consuming mills was troublesome to the long-term health and safety of the country, Shanker adds, "If copper is a commodity, it seems to me that copper in China should have the same value anywhere in the world."

However, as many point out, Chinese buyers tend to pay higher prices.

Many U.S. trade hawks have mentioned the role the Chinese yuan plays in the overall market. Trade experts say China is keeping its currency artificially low by tethering it to the U.S. dollar, giving Chinese companies a major price advantage and making it harder for U.S. companies to compete.

DWINDLING NUMBERS. As for the impact on the copper industry, the CDA reports that currently five fire-refiners, 23 ingot makers, 50 primary brass mills and about 600 foundries, chemical plants and other manufacturers are in operation.

Further, the CDA says some copper tube and wire rod mills have had secondary smelters or refineries associated with them because of their requirement for high-purity copper, but that most of these smelting and refining facilities have closed in light of the recent poor economic environment for processing scrap and the availability of low-priced primary refined copper.

Presently, only five fire-refining facilities remain: two are associated with wire mills, two with tube mills and the fifth with an independent copper ingot and wire bar maker.

While China is driving the market, the U.S. is benefiting from a strong housing market. While many people continue to wait for the housing bubble to burst, it remains robust.

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