Copper Comes Down to Earth

January/February 1993 

A host of market factors combined to knock copper from its lofty perch in late 1992, but many expect the red metal to rise again in 1993.

BY SI WAKESBERG

Si Wakesberg is New York bureau chief for Scrap Processing and Recycling.

Maintaining surprising strength in the face of economic adversity, copper stuck stubbornly above $1 a pound on the Commodity Exchange Inc. (COMEX) (New York City) in the first half of 1992, while aluminum, nickel, stainless, and other metals plunged rapidly. In fact, copper astonished traders by zooming to $1.17 a pound in July, averaging $1.14 a pound that month, a 19-month high.

But as the saying goes, all good things must come to an end, and copper's positive run was no exception. Toward the close of the third quarter, just as copper players were reveling in holding fast in a slippery economy, the market began to slide. Then, in the fourth quarter, prices fell to 15-month lows, hovering around the mid-90s-cent-a-pound range.

In the wake of this downfall, market watchers have been asking: Why did copper retain its strength for so long? What brought about its decline? And what are the metal's future prospects?

Sometimes, things are not what they seem, and some copper merchants assert that the red metal's early 1992 strength was simply illusory and insubstantial. "Copper did not react to fundamentals during this period," says one industry executive. "It was fueled by speculative buying." Large funds turned to the commodities market, he explains, when interest rates dropped and the stock market flattened out. This computerized fund buying "made for optimism and helped boost the price to its 1992 high point ," says another copper observer.

After the fund investors withdrew, the market was sustained, in large part, by Chinese purchases of refined copper, blister, concentrates, and scrap. From January to August 1992, in fact, China bought 58 percent more U.S. scrap than it did in the same 1991 period, according to statistics compiled by the Institute of Scrap Recycling Industries (Washington , D.C.).

Still, as one copper trader notes, "a sizable portion of this Chinese buying was speculative. We don't believe the Chinese contracted only on the basis of existing demand." Early in October, there was talk that China was becoming a hesitant buyer. Soon after, reports circulated that the country was liquidating some of its positions on the London Metal Exchange (LME) (London), selling copper instead of buying it.  An October report by Knight-Ridder Financial (New York City) declared: "The Chinese market is quite sloppy. It is saturated with cathodes ... there is no nearby shortage—consumers can easily buy in the domestic market." While much of this "news" was rumor and hearsay, its appearance in trade papers and magazines seems to have had a negative psychological impact on the copper market.  

By early November, Chinese demand had vanished, and copper prices descended. "Our one avenue of copper movement was to China ," an international exporter notes. "When the Chinese began to hesitate and indicate that they were out of the market as buyers, we were not surprised to see prices tumble."

Copper's rise and fall, however, cannot be explained simply by fund buying and Chinese demand. Despite its invincible image, the metal eventually fell prey to the worldwide economic recession, dragged down by sluggish demand around the globe. Just how sluggish was foreign demand? A U.S. Department of Commerce report indicates that copper scrap exports in the first eight months of 1992 fell 28 percent compared with the same 1991 period. And some exporters think the decline has been more severe than these numbers indicate.

The most notable drops from the international copper market were Pacific Rim outlets. Korean demand dipped 64 percent in the January-to-August period compared to 1991 figures, and Taiwanese purchases have slowed to a crawl. And according to a PaineWebber (New York City) report, Japanese copper consumption fell 15 percent in the first half of 1992 compared with the same 1991 period.

 Closer to home, Canadian imports of U.S. copper scrap fell 23 percent in the first eight months of 1992 from similar 1991 figures. This decline, some say, stems from Noranda Sales Corp. Ltd.'s (Toronto) decision to consume more copper concentrates rather than purchase No. 2 scrap.

In Europe , copper consumption growth has been revised downward from 2.3 percent to 1 percent. But at the same time, there is "plenty of scrap from the Commonwealth of Independent States available on the European market," notes a scrap trader, indicating that copper material has been dumped in the West at scrap prices. " Europe is underselling us," he says. "Just go to Rotterdam and you'll see the piles of material coming in. You'll get a good idea why this market has deteriorated."

In contrast, domestic copper demand has exhibited positive signs. U.S. Bureau of Mines statistics indicate that copper consumption was up 12.5 percent in the first half of 1992 compared with figures for the first half of 1991. For the year, Resource Strategies Inc. (Exton, Pa.) expects apparent domestic copper consumption to show an increase of 2.3 percent over 1991 totals. But copper watchers say that 1991 was so poor that any improvement would seem dramatic.

On the domestic scrap front, some sheet mills and other consumers have continued to take in scrap as long as the price has been favorable. No. 1 copper was said to be moving at 3 to 4 cents under December COMEX. "Levels for No. 2 copper in mid-November were about 17 cents under December COMEX," says one copper official. Low-grade scrap, with less than 25-percent copper content, was reportedly going begging. "The market is saturated with low-grade material," explains one dealer.

Another reason for copper's early strength and later troubles was the perceived shortage of smelting capacity to process copper concentrates. This so-called bottleneck appears to be easing as more capacity becomes available. There are even reports that tolling charges, which reached 35 to 40 cents a pound, have been reduced thanks to this new capacity. Other supply concerns in 1992 centered on actual and perceived labor disruptions in both South America and Europe, and worries about scrap availability, which both helped to underpin the price of refined copper on the world market.

Meanwhile, copper inventories have been creeping up, further weakening confidence in the metal. LME stocks, which hovered around 250,000 metric tons (mt) in the summer, rose to about 320,000 mt in November. At the same time, COMEX stocks nearly doubled, jumping to 63,000 mt in mid-November. Where is all this metal coming from? A merchant points to one avenue, noting that "some consumers have found it more profitable to sell cathodes [on COMEX] and buy scrap." He explains that the cathodes were sold at prices about 1 cent above December COMEX and that scrap was bought at prices around 4 cents under December COMEX. "If you think there's plenty of copper available," the source adds, "you're right."

Some industry officials are not alarmed by these rising COMEX stocks, however. They say that copper inventories—unlike surging LME aluminum stocks—are not precarious. "We'll see some inventory building by spring," says Douglas C. Yearley, chairman of Phelps Dodge Corp. (Phoenix), yet he called a 90,000 mt increase in world inventories "still acceptable for maintaining prices."

Other analysts are more apprehensive, pointing to a continued flow of copper from the former Soviet republics to Western markets—and into LME warehouses. Reportedly, about 225,000 mt of refined copper from these republics will have made its way West in 1992. Says one observer: "So far, inventories present no danger signals, but we're watching developments carefully."

Looking ahead, only the extremely daring expect significant improvement in the copper market before the spring. Most observers agree that first-quarter activity will prolong the sluggishness of late 1992.

Richard de J. Osborne, chairman of Asarco Inc. (New York City), says he expects copper consumption in 1993 to be up 2.9 percent to 9 million mt, and "the surplus of 1992 should turn to a deficit of 90,000 mt in 1993." Yearley also foresees a somewhat better year. "The market was artificially high at $1.15," he notes, adding that he anticipates a price of 90 cents to $1.10 a pound in 1993. A report by Salomon Brothers Inc. (New York City) ventures that "copper prices will test long-term support at 95 cents a pound in the coming months."

Regarding demand, despite the cloudy situation at the end of 1992, there's wide belief that China will continue to be a large buyer of foreign copper to meet its needs. While it is difficult to obtain information on China 's production, consumption, imports, and other vital statistics, some analysts believe that China will have a deficit of 150,000 to 250,000 mt of copper in 1993, which it will have to fill with imports.

No matter what bumps the copper market takes, its resiliency is almost legendary. It confounded analysts when it held above $1 per pound and it is still resisting downward pressure. Most industry officials believe, as they knock on wood, that copper will make a dramatic comeback later in 1993.