AR July 2006 -

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 said.

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,” Mothersole said.

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 this retreat.”

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 right now.”

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,” Garino said.

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 said.

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.