Healthy economic conditions in the U.S. and the growth of China’s economy have combined to dwindle the former global oversupply of copper.
Frank Wittlake, a consulting metal buyer with Cambridge Lee Industries, Reading, Pa., told attendees of the ISRI Gulf Coast Chapter Convention, held in New Orleans in mid-June, that the phenomenal growth in China has been the biggest factor.
“While consumption of rod and bar has been relatively flat in the EU and U.S., Asian consumption is up 12.5 percent in last couple of years,” Wittlake noted. He added that it is “little wonder that China attracts our attention now and for the foreseeable future.”
The increase of Chinese copper consumption and domestic production has led to red metal scrap buying that “has had a dramatic effect on copper markets,” Wittlake remarked.
He told attendees that he sees that market dynamic continuing into the next couple of financial quarters. His survey of scrap dealers has them predicting $1.23 per pound for copper at the end of 2003, while brokerage firms see $1.32 as the average price, and a “few large international firms are even predicting year-end pricing as high as $1.45.”
Both copper scrap and cathode demand remain tight, said Wittlake. “China pulling back has brought all prices down, but cathode is still in worldwide demand, and stocks are dropping; I can tell you brass mills in U.S. are consuming scrap—80 percent of their melt consists of scrap—way up over their traditional mix.”
On the Comex trading floor, copper has moved from the 80 to 85 cents per pound range in Sept. 2003 to $1.20 and higher in June, a 50 percent increase in nine months.
Wittlake commented that in the past two months, Chinese buying has diminished as the nation’s central government has been taking steps to cool down the economy.
Wittlake says this has led to “days of extreme volatility” in copper’s trading range of as much as 7 cents per day, as speculators try to determine if and when Chinese production will ramp back up.
“Expectations are that Chinese buyers will re-enter the market later this week, as the new import permitting system is put in place,” said Wittlake, although his prediction occurred before an extension of the deadline for that system was announced by the government.
Regarding that restriction, Wittlake said, “They are going to be very stringent about the type of scrap shipped into China,” and that mixing materials in one container “is going to be discouraged.”
Nonetheless, global fundamental will work in favor of high pricing. Environmental restrictions in the U.S. means not much production or mining capacity will come online here. Additionally, copper yield in ore has diminished to less than 1 percent in the ore being mined in Chile, Wittlake noted.
“These two factors, plus tremendous demand in the next few years from China, will put tremendous pressure on metal,” Wittlake stated. “China is building their power grid, and they’re going to require a tremendous amount of copper. These factors should keep copper at $1.10 to $1.45 for the foreseeable future.”
He added, “This product is going to be in terrific demand with a lot of price pressure on it for at least the next two-to-three years. Fundamentals are going to rule the situation for the near-term. LME warehouses around the world have about 114,000 tons left, of which 26,000 tons are already ticketed to be withdrawn in the next couple of weeks. By the end of this year, there may not be any warehouse stock left. This translates into a situation where we are sitting on about 3-and-a-half weeks of the world’s copper supply. I think you’ll be enjoying these prices for some time.”