To twist a metaphor, China is the bull in the copper shop. The question, however, is whether that bull is truly bullish when it comes to copper scrap or whether it is neutral or even bearish.
Whichever way the bull’s tail wags, there is no denying that China will have an impact—for better or for worse.
Chinese authorities have been straightforward about what they expect in terms of quality when importing copper scrap from overseas. The question for U.S. recyclers is whether it will be profitable to continue to serve the Chinese market.
Lowering the bar
For at least the past 10 years, China has set the bar for pricing of leaded brass, radiators and No. 2 copper.
When China was gobbling up everything any U.S. recycler could send its way, markets were good. Today, China does not seem as hungry for materials now that its smelters appear to have caught up with demand. U.S. copper scrap exports to China through September of 2016 have declined by more than 25 percent compared with 2015’s total through September, according to U.S. Census Bureau trade data. From 2012 through 2015, China’s imports of copper scrap have declined 37.61 percent. Despite this decrease, the question is whether Chinese consumers have overpurchased.
Over many months, China purchased what would amount to a huge stockpile of copper scrap. At the time, the Chinese purchases seemed to be purely on speculation, though the Chinese were in the midst of an economic boomlet. Then, the market collapsed. Nobody outside of the People’s Republic of China seems to know whether that stockpiled scrap was purchased for use in domestic projects or whether it is sitting somewhere in stockpiles. If it is stockpiled, nobody seems to have a clue as to where it is being kept, sources say.
Rumors have circulated that China is sitting on copper inventories that are stored in warehouses located in Mexico and Eastern Europe. These rumored piles of cathode seem to turn up any time there is market uncertainty, sources say.
Any time a vacuum of information exists in a commodity market, the market tends to become skittish. This is the situation with copper scrap and the uncertainty about China’s holdings.
Into late fall, observers said they were somewhat puzzled by the level of discount in the copper market. Typically, when copper drops from $3.50 per pound to $3 perpound, the market experiences a tightening in the spread. This time, that has not followed tradition. Market watchers questioned whether the anomaly is because more metal is available somewhere.
One thing seems certain: Consumption of copper in the Chinese market has dropped.
“Chinese consumer consumption has slowed, including demand for televisions, air conditioners and appliances that use copper and copper alloys,” says James H. Michel, manager, technical services for the Copper Development Association Inc. (CDA), New York City.
In addition, central planners in China have stopped building those “cities without people” that were meant to attract residents from rural areas to commercial centers. Without as much construction, internal demand for copper products is down.
“That calmed everything,” Michel says of this change in central planning.
Chinese consumers have been pivotal in pricing, says Chris Greenfield, vice president of purchasing at The Federal Metal Co., Bedford, Ohio. “If we have a supplier that has a ‘ramp quote’ of $1.70 for ebony, we’re going to need to pay a slight premium given freight and quality issues.”
Recently, however, copper scrap imports to China have decreased, and China’s consumption of concentrates has grown.
Prices have backed off for ocean, ebony, birch and cliff (grades defined by the Institute of Scrap Recycling Industries, or ISRI, Washington), and Chinese consumers of copper scrap seem to have had less impact on international scrap markets in the second half of 2016. That said, China still sets the market for honey. Because China buys about 42 percent of world copper production, there is no doubt that it is the major factor in the market.
If some U.S. manufacturers are concerned it is because of their fear that domestic recyclers might become too dependent on China for consumption of copper and other red metals. In a way, it makes sense for a recycler with easy access to ocean shipping to dump everything into an export container and abandon the North American market.
Such a strategy on the part of domestic recyclers creates challenges for companies that buy copper scrap for domestic use. A scrap seller and a scrap buyer mutually benefit from a solid working relationship and confidence in one another that deals for material of the right quality and at a fair price will be made. If an exporter’s home dries up in China, it can be expensive and difficult to reposition metal here in the United States. Establishing market contacts anew means displacing existing relationships, and that is always a sales challenge because most buyers prefer repeat business to one-off deals.
Greenfield and most other observers agree that the tenor and direction of the copper markets in the coming year will depend on China. “If China drives higher consumption and utilization, I’d suggest copper will be in for a bump in 2017,” he says.
However, Federal Metal is not forecasting substantial increases in copper prices. “In fact,” Greenfield says, “we perceive ourselves as having more downside risk than upside.”
Things could happen in the U.S. that would create a “black swan” event. On the domestic side, for example, the U.S. Federal Reserve’s decision in December to raise its key interest rate might become important for copper, as could the fallout of the November election and the first 100 days of the new administration. Add to that uncertainty the situation involving Brexit and Europe’s reaction to trade with Britain, and certainly wild cards are present.
“We’ll know for sure after the fact,” Michel says. Still, he adds that copper demand has picked up, however modestly.
The mining industry flattened its worldwide output years ago.
“The mining firms are anxious to get moving again,” Michel says. He says they seem to anticipate a return to active markets by 2020.
Meanwhile, U.S. automobile production—a harbinger of the market—is slowing. That could foretell a weaker economy or simply be because so many consumers recently purchased cars.
With the U.S. Federal Reserve raising interest rates, one might expect copper values to recover somewhat in the first quarter of 2017.
Other wild cards are in the mix. Oil, or a run on commodities, could be other factors to increase prices.
“If you read the tea leaves, China is doing OK,” Michel says, adding that the big question is what happened to all of that copper and copper scrap the Chinese obtained over the past couple of years. “Are they still digesting it?” he asks.
The question as to whether that copper still exists and could come out on the market remains. However, a move by China to buy raw copper would indicate that things are going much better in the Middle Kingdom and that much of that copper scrap had been consumed.
Michel is cautiously optimistic. “The market has picked up a bit … but modestly,” he says. While he says he does not see the market vastly improved, he sees some potential. “Flat to up,” he concludes.