Veteran scrap recyclers, who had been accustomed to pre-2000 prices for copper of less than $1 per pound, watched with amazement as prices soared to first $2, then $3 and up to more than $4 per pound in the first decade of the 21st century.
The value of copper on the London Metal Exchange (LME) reached as high as $4.58 per pound at its peak in February 2011. It has subsequently experienced a downward pricing trend and, as of mid-2016, was trading in the $2.05-to-$2.08-per-pound range.
Even though China’s economic growth has slowed, the nation continues to consume copper at world-leading rates. What has helped cool off prices, according to analysts, is an expectation that China’s level of copper consumption has hit a plateau and that copper producers have made investments and adjustments to meet the new level of global demand.
THE NEW NORMAL
After years of rapid economic growth, economists in China (seemingly prompted by Chinese Communist Party central planners) have referred to the slowdown of that growth as a “new normal” for Chinese business owners and workers alike.
The extent of China’s economic slowdown—many observers are highly sceptical of the government’s “party line” of recent 6% to 6.5% annual gross domestic product (GDP) growth rates—is uncertain, but its influence on global metals markets has been unmistakable.
The most recent forecast prepared in March 2016 by the Lisbon-based International Copper Study Group (ICSG) says, “The copper market is expected to remain essentially balanced in 2016 and 2017.” This compares with previous forecasts predicting deficits of 127,000 tonnes and a surplus of 175,000 tonnes for 2016 and 2017, respectively, formulated prior to the ICSG’s October 2015 meeting.
ICSG says, “Downward revisions have been made for both production and usage in view of global weaker economic outlook and project delays and price-related production cuts.”
As its staff members and allied economists have reviewed recent economic data and prepared forecasts for the rest of this decade, ICSG says it has considered several factors, many of them tied to the China-inspired commodities “super cycle.”
“World mine production, after adjusting for historical disruption factors, is expected to increase by around 1.5% in 2016 (lower than the 3.5% growth in 2015) to reach 19.4 million tonnes,” says the group.
On the demand side, ICSG’s forecast does not specifically use the phrase “new normal” to describe the effects of China’s slowdown on the copper industry, but similar references are there.
“ICSG expects world apparent refined usage in 2016 to remain essentially flat,” the group says in its March 2016 news release presenting its updated forecast. “This is mainly because apparent demand in China is expected to remain essentially flat (+0.5%), although underlying ‘real’ demand growth in China is estimated by others at around 3% to 4%.”
In addition to relief on supply and price pressures formerly caused by rapid Chinese growth, forecasts for the rest of the world’s economies are far from strong. ICSG says of copper demand in the rest of the world in 2016, it “is expected to remain practically unchanged.”
Regarding next year, the group concludes, “For 2017, the growth in world apparent refined usage is expected at around 1.8%, with underlying Chinese industrial demand growth expected at around 3%, while usage in the rest of the world is expected to increase by about 1%.”
Considering the opaque nature of economic statistics emanating from China, even the revised ICSG forecast for copper demand in 2017 could end up being rosy.
For scrap recyclers, the new normal for primary supply and demand has yielded a number of changes to their global market.
EBBS AND FLOWS
Red metals scrap processors and traders alike face genuine limits on their ability to make money if scrap does not flow across scales in the first place.
As the value of copper has drifted downward since its 2011 peak, that has been one of the leading business challenges for those in the industry.
At the 2016 Bureau of International Recycling (BIR) World Recycling Convention in Berlin in May and June as well as at the Institute of Scrap Recycling Industries (ISRI) 2016 Convention & Exposition in Las Vegas in April, the dwindling of scrap supplies was a foremost topic.
Part of the dilemma for processors was that during the peak scrap flow years from 2003 to 2011, new scrap purchasing and processing facilities sprouted like mushrooms after a spring rain shower.
While the price of copper by mid-June 2016 was trending upward in fits and starts compared with earlier in 2016, access to sufficient scrap remained the bugaboo.
The peak copper pricing years coaxed out new sources of red metal scrap from neglected buildings and rural and isolated areas great distances from the nearest scrap yard. (That some of this metal was stolen created a new business challenge for the recycling industry as well.)
That situation has changed dramatically, however. Not only has copper pricing dimmed the enthusiasm of informal scrap collectors, but the price of steel and ferrous scrap experienced a sudden drop in late 2015 that put the brakes on other forms of scrap collection.
In early 2016, recyclers were pointing to severe disruptions in the collection chain, crimping supplies. The situation was made all the more dire by the presence of the additional postboom processing facilities competing for the now woeful supply of scrap.
Comments prepared for the March 2016 edition of the BIR’s World Mirror captured the situation in Europe and other regions. “The mild winter did not generate a lot of scrap,” writes Jurgen van Gorp of Belgium-based scrap refiner Metallo Chimique. “Low steel prices are still impacting nonferrous flows into yards.”
By the start of the second quarter of 2016, relief first took the form first of adjustments to expectations of scrap suppliers, followed by increased ferrous scrap pricing that brought more automobiles, appliances and mixed scrap loads into yards.
In the same version of the World Mirror, Mogen Bach Christensen of the Denmark-based H.J. Hansen scrap firm writes, “The [nonferrous scrap] market appears to have accepted current price levels and materials are now flowing a little more easily than in previous months.”
Volumes began picking up on the vehicle and appliance side in April and May, owing largely to the increase in ferrous scrap’s value, according to recyclers in the United States and Europe.
While conditions in mid-2016 may mark an improvement over the first quarter of the year, United States-based recyclers contacted by the Recycling Today Media Group in June 2016 were far from wildly optimistic. Some contacted sources instead expressed concerns that conditions are ripe for a slide.
While the price of copper by mid-June 2016 was trending upward in fits and starts compared with earlier in 2016, when copper fell to the $2-per-pound range, access to sufficient scrap remained the bugaboo. One source pointed to a lack of phone calls or inquiries from people looking to sell material.
“We probably have had half as many calls now as we did last year,” he commented. “We aren’t really having any problems moving [metal], although prices are definitely not where we would like for them to be.”
The unenthusiastic sentiment reflects the lingering hangover the scrap recycling industry continues to experience now that the China boom party seems to have dimmed the lights and ushered out many of the guests.