Shining on in 2005

Copper scrap is in its second year of a strong market, and there does not seem to be any slowing it down—at least, not in the short run. Primary copper and scrap are moving at consistently high prices. While demand is good, the limited supply in the market is the factor most influencing high prices.

How long the imbalance will remain is open to conjecture—but for the near future it looks like the market will continue to struggle to pull in material and will trade in a strong price range.

TIGHT SUPPLY LINES. "The high prices we are experiencing with copper and brass have not been terribly reflective in the quantities of [scrap] materials one would expect," says Melvin Lipsitz, Jr., of M. Lipsitz & Co., Waco, Texas. "We’ve seen some increase in different locations and markets—but not with the consistency we would expect."

No. 2 copper in Texas was bringing 15 to 21 cents under the March COMEX cash price.

"Material is not coming in. We’re still having problems getting what we need," agrees Richard Lerner, vice president of Cycle Systems, Lynchburg, Va. Even though the prices are strong, Cycle Systems is having some challenges meeting its demand.

"Price is not helping us as much as we thought it would," he says. "We are able to fill orders. It is just taking a while to get the material we need."

David Hightower, publisher of the Chicago-based Hightower Report, says the exchange stocks also are declining. "Five or six months ago was the heart of the bull market," he says. "Since then, we have been chipping away at stocks, especially on the Shanghai market."

Lerner says that Cycle Systems experienced a large in-flow last year when the market went up. "I’m not sure that there is that much more material available," he says. Yet the price is staying relatively consistent. "Apparently the copper people are getting the amount of material they need, or the price would go up [even more]," he says.

Lerner says he feels the supply problem is specific to the company’s location on the Eastern Seaboard and that conditions are not identical elsewhere. "Here we are having problems getting material," he says. "Other areas do not seem to have the problem."

In Nebraska, for example, the story is different. "Material is still flowing here," says Sam Jacobs, Columbus Metal Industries, Columbus, Neb. "We have not stopped, even with the bad weather." He says that while the winter storms might have caused hiccups in deliveries, they rarely lasted more than a day or so. "The pounds keep coming," he says.

He credits higher prices for keeping the copper flowing. "There is a certain amount of material at each price level that will be sold," Lipsitz says. "In some markets, there may be a small amount of items out there."

Lipsitz says that sellers like electrical contractors might inventory their insulated copper for some time before bringing it to market. "It is not part of their business to buy and sell," he says. They move material when they need some additional income.

As an analyst, Hightower monitors scrap, new supply, the International Copper Study Group’s figures and world markets. "My intuition tells me we probably have not peaked out, but we are getting closer," he says.

His advice to recyclers is to keep a close eye on the other side of the market. "Price has begun to influence purchase decisions," Hightower says.

He says the current prices have brought in most of the easily recoverable stocks. "There is still some material out there," Hightower continues. "I don’t think the top will come off the scrap market. It is a defined universe."

By February, the LME (London Metals Exchange) spot price for copper was at $3,260 per metric ton. That is significantly above the $2,500 of a year ago. And the prices in the scrap market stepped up smartly along with the price for primary material.

A year ago, with the price for scrap copper more than $1.10 per pound, the market was ecstatic. It took a while for the world copper scrap stockpiles to get pared down. This happened mainly because of strong demand from China in the face of a pull-back in output by mining and refining operations. While Chinese companies are readjusting their industrial purchases, observers say they are still a positive factor in the market and should continue to be buyers of scrap.

THE CHINA SYNDROME. "The Chinese are starting to come back into the market strong," says Bernie Schilberg, Prime Materials Recovery, Hartford, Conn. Prime purchased the assets of the former Schilberg Integrated Metals.

Schilberg says the Chinese presence in the market is a two-edged sword. "They are taking away the raw material that I need for my markets," he says, "but they are also building the price of copper."

Copper prices have been staying aloft at their higher trading range of late. Schilberg says that he does not see the Chinese pushing prices to even higher levels. Rather, he says their presence in the market will limit the downside potential.

The Chinese are heavy buyers of the lower grade items. This benefits domestic scrap yards in a couple of ways. For one, it gets less desirable grades off the market and out of the yard. For another, it provides a floor under the market, allowing the better grades of copper scrap to continue to move at good prices.

"I’ve noticed a continued interest in the Asian market for consumption of copper items," Lipsitz says. Like others, he experienced the pre-Chinese New Year slowdown.

Jacobs’s experience was the same. Outside of holiday slumps, "Export markets have been decent," he says. In addition to China, he has seen a few loads go to India, but not a lot.

The rumor mill, always hot when it comes to the Chinese market, says Chinese buyers will be back in many scrap market segments—not just copper—with a vengeance as 2005 wears on. However, the fear is that the Chinese will not participate as heavily as anticipated.

Hightower dismisses this fear. As he puts it, "China is the 800-pound gorilla in this market."

The Chinese managed better growth in the fourth quarter of 2004 than they did in the first three quarters. Yet their inflation rate is down.

"I don’t know that people should expect China to shut off," Hightower says. "While they do some forward purchasing, they do not hoard. Their economy is still growing, so I would not expect them to be absent from the market…at least through the Olympic Games."

OUTLOOK FOR 2005. "Copper will continue on a roller coaster," Jacobs says. He sees it trading in the $1.30s and up into the $1.40s for quite a while. He says that consumers are somewhat backed up on dates, but otherwise he has seen nothing to indicate that they are abandoning the market.

"We will see a slowdown one day, but not overnight," he says. "There is still demand out there. If the demand slows down, then we’ll see a change."

Lerner notes that slowdown in the auto assembly industry could be a black cloud on the demand side. On the other hand, housing is steady to stronger, which is definitely a positive.

Across it all, Lerner says he expects the price of copper to stay relatively consistent over the short term—say the next three or four months.

"It will fluctuate up a little. There is room to go down a little. But I think we’ll stay in the current range," Lerner says. "Supply and demand will balance out."

Lipsitz sees a strong first half, too. "We are at a pretty good, high price right now," he says, adding that he expects prices to stay well over $1 per pound for the first half of the year.

Given his choice, however, Lipsitz would rather see somewhat lower, but flatter prices. "I would prefer a consistent price rather than the volatile ups and downs we have experienced these past few years," he says. "A consistent price around the 70- to 90-cent range would take the pressure off money management for inventory and receivables."

Lipsitz says that the current ferrous market is distorting things in many phases of recycling, making the business as tough as it has been in his firm’s 110-year history as a family-run business. "It’s a matter of how good managers we can be," he says. "I don’t want it to fall apart on my watch.

His outlook is positive. "I’m optimistic about the recycling industry now and into the future," Lipsitz says. "But we have to be prepared for the ups and downs. We don’t make the market, but we have to live with it."

Hightower does not see Lipsitz getting his wish for a steady trading price. "Anything but a nice narrow range," Hightower says.

"Current prices might temper demand a bit. I see the market having the potential to drop off," he continues. "The economy is operating on four cylinders…if the economy improves, it will improve the copper outlook," Hightower adds.

His expectation is for a futures price in the $1.45-$1.47 per pound range to be the high watermark for copper this year.

"It all comes down to demand outlook," Hightower says. "Maybe we will not have a huge [supply] deficit at the end of 2005, but there will be a deficit," he says. "It is the job of the futures market to factor that deficit in. We’ll see what the market says at the end of the first quarter or the beginning of the second."

Schilberg says he is sure that one of the things recyclers will live with is a dearth of supply. "We still see the high grades of copper in high demand and short supply." He says that the demand for No. 2 copper looks stronger.

Schilberg says he expects the price for copper to hover between $1.30 and $1.50 through the first six months of the year.

Recyclers have to go back a decade to find ranges this high for copper. In 1994, prices hovered between $1.24 and $1.45 … spending most of the middle part of the year in the upper $1.30 range. Worldwide, competition was strong for copper scrap and business was good in China, Europe and the United States.

However in 1995, the Comex price nose-dived below 90 cents. By early 1999, the price was around a half-dollar.

The consensus is that it will be quite a while before prices slump that low. 2005 looks to be more like the halcyon year of 1994. If supplies remain tight and a stronger economy fires demand, the inevitable drop-off will be postponed for some time.

The author is a Recycling Today contributing editor based in Cleveland. He can be reached at curt@curtharler.com.