Scrap copper market to tighten

Reuters | Thu, 24 Sep 2009 13:44
[miningmx.com] -- THE market for copper scrap is set to tighten as competition for the secondary raw material, eagerly sought as a cheaper alternative to refined copper cathode, rises globally.

"Every consumer and trader is running around chasing the same piece of scrap. The consumers have let their inventories run down, so if the recovery is coming they are all nervous they won't have enough scrap," said Marc Kaplan, president of US-based Mews Metals Trading.

In addition, merchants and fabricators say China, the world's top copper consumer, is likely by the year end to resume its habit of importing as much scrap as it can get its hands on.

This could create a problem for European and US fabricators who, along with the Chinese, are starting to increase production in response to improved order books.

"At the moment the Chinese are not interested in cathode or scrap but we expect to get them back. Nobody knows when - October, November, December, at some stage they have to buy because demand is there," said a scrap buyer for one of Europe's top producers of copper and copper products.

Scrap, which accounts for more than a third of the world's copper needs, was in extremely short supply at the start of the year, prompting China to import a record 1.8 million tonnes of the more expensive refined copper cathode in the first half.

The restocking meant copper prices surged as early as the first quarter, when global equities were still suffering the effects of recession.

London Metal Exchange (LME) copper futures have doubled in the year to date, trading at around $6,100 a tonne on Thursday.

During the summer, however, the Chinese largely withdrew from the market for cathode and scrap, due to a customs crackdown on tax evasion, and to the closing of the arbitrage window that makes imports profitable.

Latest Chinese data showed August cathode imports fell 42% from June's record high and, although scrap imports rose 41%, this was skewed by the fact that customs cleared a backlog in Guangdong port.

In other words, scrap orders were relatively subdued over the summer but they have been improving overall since the second quarter, while cathode imports have started to decline sharply.

If the trend holds, copper prices could be at risk.

However, many in the market believe China will be hard pressed to replace some of its cathode needs with scrap this year, even though global scrap supply is improving thanks to higher copper prices and recovering manufacturing activity, which generates scrap as a by-product.

"I expect Chinese scrap imports will level off going forward because there isn't enough copper scrap in the global system," said Rob Stein, marketing vice president for Alter Trading Company, a leading US scrap metal recycler and broker.

Every consumer and trader is running around chasing the same piece of scrap

He noted scrap discounts usually widen out when the market is well supplied with scrap. But this has not happened.

Part of the reason is rising demand in Europe and the US.

"Production at fabricators in Europe has improved because they have higher order books. Destocking is over with, customers of fabricators have to buy what they need," said a purchasing manger at one of the world's largest copper fabricators.

This is also reflected in Chinese customs data. Scrap imports in January through to August fell 34% year-on-year, while cathode imports rose 166%.

So where does this leave the copper price?

"The issue is demand growth that meets insufficient supply growth and that's relatively supportive for copper prices," said Merrill Lynch analyst Michael Widmer, noting fabricator demand will be supported by stimulus programmes even in 2010.

A crucial issue is the underlying demand at the consumer level, the key to determining whether the copper price rally continues.

While latest surveys of US consumer confidence and retail sales showed better than expected readings, consumer buying power is still constrained by high unemployment, as shown in latest US jobs data.

As such, while many analysts cautiously expect further gains in copper prices, others remain sceptical.

"Until the consumer joins the party you're not going to see any sustainable recovery ... unemployment is still rising, wages are falling, where is the consumer recovery coming from? It isn't," said Simon Hunt of Simon Hunt Strategic Services.