Nonferrous - Commodity Report

There is never a dull moment for those who deal in the red metal copper. After copper’s stratospheric rise during the past several years, many scrap recyclers had expected a significant correction last year. While there were some downward adjustments during the back half of last year, overall, the sharp plunge in prices never happened. Now, many market observers say they feel that copper could see some upward movement this year.

This upward movement is predicted despite a sluggish U.S. economy, which will likely curtail strong U.S. demand.

China is expected to play a major role in any resurgence copper experiences, with steady to strong demand keeping the floor price for the metal much higher. Copper pricing, however, has gotten off to a somewhat slow start, with Chinese buyers coming off the Lunar New Year without strong orders for more copper. This had knocked down copper prices toward the middle of February.

While strong orders were not placed in February, a number of reports indicate that there are reduced inventories of copper at the London Metals Exchange. This is maintaining a strong floor price for copper.

Meanwhile, a report by the investment banking firm Credit Suisse Group notes that the sharp increase in copper production may be less than earlier expected. The report notes that copper supply this year may increase by 1.9 percent, less than an earlier anticipated increase of 2.3 percent. The report also notes that next year’s copper supply projection has declined from an earlier forecasted increase of 3.6 percent to 3.3 percent.

While signs point to the availability of less copper, the question of how long the U.S. economy will remain in a slowdown also could affect the relative strength of the metal.

With some economists noting that the economy could improve as soon as the second half of the year, any increased demand for copper from the U.S., matched with steady to stronger buying from sources outside North America, could drive copper prices far higher.

Another report is even more bullish, speculating that copper prices could head to record price levels this year. The reason cited for the more bullish view is that supply has not been able to keep up with demand.

While the outlook for copper through the end of the year is fairly strong, in a much shorter window, the end of Chinese New Year did not result in a surge of new orders. A number of reports have said that Chinese buyers are opting to sit out the market in light of the higher prices. However, most speculate that the inactivity will not last too long.

Aluminum also could see a jolt in price and demand during the first part of this year. One factor that could create higher aluminum pricing has been the shutdown of a number of aluminum smelters in China. Inclement weather may have resulted in approximately 1.3 million metric tons of aluminum being taken off the market. While some of these facilities may come back online toward the middle of the year, others are expected to be closed permanently.

While there is a fair amount of bullishness for nonferrous metals, some observers express greater caution that a significant downturn in the U.S. economy will undoubtedly cause a ripple effect throughout the world. This would likely push prices downward, at least in the short term.

While areas of concern exist, a number of high-profile moves by large mining and metals firms to acquire competitors (See "Mega Mergers", p. 66.) could indicate a bullish outlook. One analyst says these companies wouldn’t be paying such sums for their acquisitions unless they felt the market was still strong.