ISRI Roundtables: Fundamentally Sound

For the past few years, the world’s scrap dealers have benefited from newfound demand for their materials—especially copper bearing-scrap—from the booming Chinese economy.

The production of red metals in China is likely to remain at its new lofty level, which should keep copper trading at the top end of its range for the foreseeable future, according to presenters at the ISRI (Institute of Scrap Recycling Industries Inc.) 2005 Commodities Roundtable Forum.

“I think you’ll see continued high prices,” said Megan Hovey of Refco LLC, Hudson, Ohio. She predicted that copper would trade on the Comex market at an average of from $1.45 to $1.55 per pound in 2006. “China is going to remain the biggest consumer of finished copper,” she added, remarking that the nation now consumes about 20 percent of the world’s copper.

On the supply side, some new mining capacity is coming online, LME inventories are starting to build back up and some time next year, projected supply should exceed demand.

But thus far, the market is not reflecting these renewed supply factors. Hovey said copper trading at $1.70 is higher than she thought it would reach, so she will not be surprised if her $1.50 forecast for 2006 is low. “Prices may not necessarily move to $2.00 per pound, but then again I didn’t envision $1.70,” she remarked.

Other panelists backed the notion that market fundamentals are sound. David Lane of heating and air conditioning manufacturer Lennox International, Richardson, Texas, said domestic demand for copper tubing remains strong. “Our industry is expecting to use some 30 to 70 million pounds of additional copper” in 2006, he remarked.

A development that could reverse that trend in the future, though, is the introduction of an aluminum coil by a competing manufacturer. Should this prove workable and economically sound, others could follow. “At $1.70 per pound for copper, you’re going to see manufacturers find ways to build units without copper,” said Lane.

Rick Rifkin of OmniSource Corp., Fort Wayne, Ind., says the copper market’s pricing and backwardation shows “the market is screaming for that material to come to the market today.”

He says OmniSource is using faster, more efficient processing methods to keep inventory low and also does some hedging to minimize risk. “We try to maximize our throughput and minimize our inventory,” said Rifkin. “Especially at $1.70 per pound for copper, you don’t want to carry a lot of inventory.”

Rifkin said processing improvements have enabled OmniSource to turn around its streams of industrial scrap at a 15-day average while obsolete scarp inventory turns over in 30 days on average.

Ingot manufacturer Allan Sabol of Colonial Metals Co., Columbia, Pa., says his segment of the market still has excess capacity, particularly because there are fewer ingot-melting facilities in the United States.

“Our concern is that the manufacturing industry is dying [in the United States] and there doesn’t seem to be any groundswell of support [to save it],” Sabol remarked.

Rifkin and Lane also expressed concern as to the state of domestic manufacturing, with Rifkin pointing to the cost of insurance and regulatory compliance as concerns, and Lane noting that manufacturers in Asia can produce window air conditioner units “for less than what it costs us to build a coil.”

The ISRI 2005 Commodities Roundtable Forum was held in suburban Chicago from Sept. 20 to Sept. 22. Some 600 brokers, traders, processors and suppliers gathered for the educational and networking event.