FOCUS-US copper scrap trade rips usual theories
By Derek J. Caney
biz.yahoo.com
Monday April 6, 8:49 am Eastern Time
TUCSON, Ariz., April 6 (Reuters) - The theory that lower COMEX copper prices yield tighter scrap markets is often repeated with fugue-like regularity, but according to attendees of the American Copper Council's Copper College, that theory doesn't tell the whole story.
Spot merchant premiums in the refined copper market have nearly doubled in the last six weeks, partially as a result of increased buying of refined copper as the scrap market tightens.
U.S. scrap merchants price their products at a differential to the COMEX price, which has fallen more than 40 percent since June 1997. As the COMEX price drops, the conventional wisdom is that scrap dealers withhold sales from the market, because the value of the copper in their inventory has dropped.
Consumers of copper scrap, namely brass mills and tube mills, are then forced to substitute refined copper for scrap, which in turn provides support for the copper market.
The tightness in scrap plays a integral part of Asarco Inc's (AR - news) bullish outlook for the copper market.
''With copper prices well under the $1.00 a lb level that seems to keep the scrap flowing freely, scrap in the west is now very tight,'' said Frank McAllister, Asarco's president and chief operating officer in his keynote address last Thursday.
''Five refineries in Europe are now curtailed or shut down and scrap deliveries from the principal supplier to our Amarillo refinery are off 20 percent in the last three months,'' he said.
He predicted that scrap availability would decline by nearly 130,000 short tons in 1998 from 2.6 million tons in 1997. ''If current trends continue, however, an additional shortfall of 100,000 to 150,000 tons of scrap could develop.''
Bernard Schilberg, executive vice president of Schilberg Integrated Metals, a Willimantic, Conn., scrap merchant, tried to debunk the conventional wisdom noting that wire mills, the main generators of scrap have become much more efficient in their production processes in the last 10 years and don't generate as much scrap.
''You also have brass mills that consume more scrap now than they ever have,'' he said. ''They are trying to reduce their dependence on the more expensive cathode (refined copper). Scrap now accounts for 80 to 90 percent of what brass mills cast into sheet and strip.''
He also noted that many scrap dealers don't have the space in their lots to carry inventory.
Another hole in the theory, traders said, is that many scrap processors aren't highly capitalized companies. ''We're not talking about giant companies here,'' explained Frederick Demler, minerals economist with ED&F Man International Inc's metals division.
''We're talking about companies that need cash flow,'' he said. ''They can't just sit on this scrap until prices hit $1.00 a lb. Eventually that material that will have to come to market.''
The conventional wisdom is that scrap supplies start to dry up under $1.00 a lb. The last time spot copper was a $1.00 a lb was last summer. Prices are currently hovering around 75 cents a lb and are poised to test a four-and-a-half-year low.
Demler added that scrap dealers are unlikely to remain tolerant as prices continue to fall. ''The pain threshold keeps dropping,'' he said. ''When the price was at 90 cents, scrap dealers might say, 'I'm not selling until the price hits $1.00.' Likewise, if the price moves to 70 cents, that threshold moves lower. So you might see scrap start coming back into the market at 80-85 cents.''
Nevertheless, scrap is expected to remain tight for the next three months, he said.
Other scrap dealers noted that weak COMEX price has provided little incentive for manufacturers to recycle their metal.
''It takes time to strip insulated wire or sort scrap or find scrap in autos,'' said one scrap processor. ''It's not worth it even ship that stuff to the scrap yards if prices are only 70 cents a lb.''
Scrap differentials have been holding steady, traders said. Barebright scrap is trading at around 1.00 to 2.00 cents under COMEX May. Burnt scrap is trading at 2.00 to 3.00 cents under May. And No. 2 refinery scrap is at 12 to 14 cents under COMEX May. |
