Scrap copper prices stay
Volatility in the market may signal changes
ahead for scrap copper recyclers.
“I don’t see how prices are supported
at the current level,” said John Mothersole, senior economist
for Global Insight Inc. Mothersole tracks copper for the research
firm in Washington D.C. “There’s going to be a change
in the market,” Mothersole said.
Prices for copper hit $8,700 a metric ton
during May and fell below $8,000 within a couple of days. The
markets quickly rebounded above $8,000. “It suggests that
even the copper bulls in the market are getting a little nervous
given price levels today. There really isn’t underlying
support for these fantastic price levels,” Mothersole
What does this mean for scrap copper recyclers?
The price for new copper on the international exchanges was
up about 150 percent year over year in May. Scrap copper prices
tend to move almost in lock step with copper prices. “The
extraordinary price increases that we’ve seen in copper
are fully reflected in scrap,” Mothersole said.
“Copper market fundamentals are very
good right now in the sense that inventory is low and we have
seen good consumption growth,” Production continues to
increase to meet global demand. “Although fundamentals
are good, they’re not as good as what would be suggested
by the fantastic run in prices that we’ve seen,”
Economic models show a small surplus of copper
this year, which would suggest a building of inventory, Mothersole
said. “I just don’t see how price levels continue
to be supported at this level, if in fact we begin to see an
inventory build,” Mothersole said.
“I think what’s going on is we’re
seeing a speculative surge in the market, a bubble, that’s
going to unwind at some point. The question is what triggers
Copper entered 2005 in a large deficit position,
Mothersole said. “As we moved across 2005, the deficit
became smaller. As of January that deficit disappeared,”
Mothersole said. Consumption growth has also inched down. “If
consumption remains flat or even declines slightly it doesn’t
take too long for that surplus to begin to manifest itself someplace.
It would start to show up in inventory,” Mothersole said.
“Where do we see prices coming down
too? I wouldn’t be surprised if over the next year prices
come all the way back to about $5,000 a metric ton. That would
still be a very good price for copper historically.” Mothersole
said he expects copper prices, now ranging from $3.60 to $3.90
a pound, to fall to about $2.25 to $2.30 a pound.
“Historically, a price over $1 a pound
was considered very healthy,” Mothersole said. “Scrap
merchants are getting a very generous price for their product
Global Metal Recycling Services Inc. based
in Montreal is one of scrap recyclers benefiting from the surge
in copper prices. “The prices have doubled over the past
12 months,” said Jeff Solomon, chief executive officer.
Solomon said speculators, rather than the businesses that actually
consume the copper, have bid up the price.
The privately held company purchases copper
scrap from the plumbing, construction, demolition and renovation
trades. It also purchases copper scrap from various manufacturing
companies that use copper as part of the manufacturing process.
“Due to higher prices, it allows us
to work on a slightly higher profit margin,” Solomon said.
When copper is $.80 per pound, he said it is virtually impossible
to make $.20 per pound. But with copper prices hovering near
$4 a pound, the spreads are much better. Solomon said margins
therefore are much better this year than last year.
Scrap recyclers are paying more to get supply,
said Bob Garino, director of commodities for the Institute of
Scrap Recycling Industries Inc. in Washington D.C. “It
filters down. Everybody knows the copper price. It is very transparent,”
Profit margins for scrap recyclers tend to
widen as prices of scrap go up, Garino said. With the latest
increases in copper prices, however, margins have remained rather
narrow for scrap recyclers. “These are very difficult
markets. There is no reference for past history because we are
at all time highs for primary copper,” Garino said.
“It is a very confusing time for buyers
of scrap and sellers of scrap.” High prices have brought
out a lot of scrap copper, especially old and obsolete material,
everything from copper radiators to old wires. “Everything
that contains copper is sucked out because the incentive to
sell scrap is much higher at a higher price,” Garino said.
The amount of industrial scrap copper, however,
has diminished over the last few years due to efficiency measures
and loss of manufacturing. “People are worried that domestic
scrap could reach a point where it does become very tight and
higher prices may not bring out all that much more because of
supply constraints,” Garino said.
This scenario is just theoretical at the moment,
Garino said. “There is no shortage of scrap. More is coming
out.” More than 160,000 metric tons of scrap copper was
exported in the first quarter, an increase of about 9 percent
compared to last year.
The United States consumes close to 920,000
metric tons of scrap copper a year. Plus, the country exports
another 658,000 metric tons of scrap copper. “You’re
talking about a very big market in terms of scrap supply and
scrap demand,” Garino said.
United States copper scrap consumption has
been fairly weak since 2000, however, said Mothersole at Global
Insight. The economist said that the scrap consumption level
is down about 40 percent from the late 1990’s. “A
lot of domestic industry has migrated overseas, and in particular
wire production has migrated offshore,” Mothersole said.
“More of what we generate here is going
overseas,” Mothersole said. China took about 20 percent
of the country’s scrap copper exports in the late 1990’s.
Today the percentage is well over 60 percent of total scrap
exports. “We continue to generate scrap. Increasingly
it is exported rather than consumed domestically,” Mothersole
Global demand for scrap copper is impacting
scrap copper prices. “Recyclers are enjoying it. They
are certainly getting a good price for their product,”
Mothersole said. The current price levels would suggest a physical
tightness of supply in the market. But so far, Mothersole said
he is not hearing about scarcity from any of his clients.
“All of them said, uniformly, that they’re
paying extraordinary prices for their buys. But none of them
noted problems getting material,” Mothersole said.