China Buyers Drive Up U.S. Scrap Metal Prices

A seemingly insatiable appetite for copper and aluminum scrap among buyers from China have kept prices strong and spreads with primary metal exceptionally tight, and industry players said they see the trend continuing at least through the first quarter of 2004.

For the last year or so, hefty Chinese demand has had a major impact in re-shaping the landscape of the U.S. secondary metal market, said one metal trader after another.

"They're running the market. They're the major buyer. There's no question about it. They're the major force in the market," said Marc Kaplan, president of Mews Metals Trading.

"The Chinese are the biggest factor. There's no doubt about it. I don't see them disappearing one iota. They have not let up at all," said Kronick Industries president Bruce Kronick.

Their quest for metal has widened to include higher grades of scrap, driving prices well above what other consumers can afford, and created a dearth of metal in the United States.

U.S. traders said China metal buyers are fierce competitors but forthright counterparties, who "leave money on the table" as they snap up any metal they can get.

"It's helping the scrap industry because they'll buy anything. As far as the secondary (smelting) side of it, it has forced, definitely forced the pricing upwards," Kronick said.

Traders said the shortage has been especially painful for U.S. copper and brass scrap consumers, particularly those located on either coast where export businesses thrive.

"Domestic red metal guys are having a hard time. The brass and bronze ingot makers are ready to kill themselves. They can't compete. Their cash flow is terrible, so they're paying their bills slow, which adds insult to injury," said Kaplan.

The metal scarcity has forced many U.S. domestic scrap consumers into substituting primary metal for scrap.

An aluminum dealer said primary smelters use tremendous amounts of scrap in their sheet, extruding and billet plants.

"But they can't get that scrap. It just isn't here. And they're competing against the Chinese. So, they end up using their own pure metal. That's why prices are strong and will remain strong through the first quarter at least," he said.

With the lack of scrap leading to increased primary metal purchases, Kronick said, "I believe you're going to see primary more in demand than it had been. So you're not going to see the great excesses lift up on that either. And as business gets better, it'll just get tighter and tighter."

Exacerbating the U.S. metal shortage is the growth of manufacturing in China. As a result, scrap metal generated in the production process is getting left there.

But some traders said they expect the recent frenzied pace of Chinese buying to slacken after the first of the year when China plans to repeal some export tax rebates.

Chinese traders have in part been able to pay prices that U.S. traders said "do not make sense" because of a generous value-added tax or VAT rebate awarded to exporters.

Last month the Chinese government announced plans to cut rebates on key commodities in a move intended to ease its financial burden and to relieve pressure on its currency.

From Jan. 1, China will cut VAT rebates on copper and aluminum scrap to zero from 13 and 15 percent, respectively.

"The tax will make their purchases a little bit more difficult, because they will have to pay duties they weren't paying before. That's part of the reason they've been so aggressive these last 2-3 months, because they're very anxious to get things moving and in country," said Kaplan. Reuters