March/April 1988
Low inventory, high consumption, and limited scrap supplies keep the copper market firm.
By Si Wakesberg
Si Wakesberg is a New York City-based consultant to the Institute of Scrap Recycling Industries.
With Comex spot copper hovering at the edge of $1.00 a pound, despite a price drop of nearly 30 percent since the end of 1987, a remarkable optimism about the first half of 1988 prevailed at the ReMA Copper Roundtable on February 4, in New York City. "The sharp price drop can be attributed more to fear of recession than to current fundamentals," said one speaker. "I believe that the market will regain strength and that prices will be firm well into the second quarter," noted a copper merchant. The reason for this optimism: Stocks of refined copper are at a 17-year low; world consumption is at a record level; production problems are looming abroad; and scrap supplies remain limited. The combination yields a tense supply situation that caused one roundtable analyst to forecast that, barring a recession, "producer prices for cathodes could rebound to between $1.25 and $1.50 a pound in the second quarter."
However, speakers also pointed to the pitfalls of the 1988 copper market: a fall-off in demand from the housing and automobile markets; increased volatility in exchange trading; sharp currency fluctuations; the continuing budget deficit; and, above all, fear of an economic recession. Last October's stock market crash was cited as a sign that things could go awry.
Copper consumers are grappling with foreign competition, and the recycling industry is facing the critical challenge of Superfund. Yet, a decidedly positive mood filled the air as moderator Larry Sax, J. Sax & Co., division of WTE Recycling, Boston, Massachusetts, opened the meeting--a mood that persisted throughout the roundtable.
Copper Demand Will Hold in 1988
"After four solid years of copper consumption and declining stocks, we are optimistic about copper in 1988," said Robert Bothwell, vice president-sales, Asarco, Inc., New York City. The last four consecutive years also showed what he termed a "supply deficit"--almost 400,000 net tons in 1987. Stocks on the LME and Comex have been brought down from nearly 1.3 million tons in 1984 to 77,000 tons by the end of 1987. Bothwell pointed out that the 1987 terminal market stock dropped 206,000 tons and that di about 60 percent of the decrease took place after October l." Copper stocks held by producers also skidded during this period.
"Can stocks be taken any lower?" asked Bothwell, saying that it would be difficult without dislocations developing in the marketplace. He expects copper production to increase in 1988 and demand to be firm. "With stocks of refined copper at a 17-year low, incremental increases in output will be required to close the gap with consumption and, if possible, to add some needed inventory."
Brass Mills Seek to Strengthen U.S. Markets
U.S. brass mills have weathered what is probably "one of the most violent periods in copper history," said Arthur Thorsen, vice president-metals purchasing, American Brass Co., Buffalo, New York. Thorsen doesn't believe brass mills have built "any significant inventories during the price run-ups in the last half of 1987." Clouds on the horizon include a thinning of demand in some markets, according to Thorsen, who supports hedging because "a brass mill's profit is measured in just a few cents a pound."
Thorsen addressed the importance of quality, on-time delivery, and foreign competition. "Since 1985, brass mill imports have gained 12 percentage points of share of the domestic market," he pointed out, noting that "foreign competition can buy scrap cheaper" than domestic companies. Nevertheless, Thorsen stressed that U.S. brass mills were strengthening their hold on the market and said that "domestic fabricators were not afraid of competing on a level field."
Secondary Ingots in a Volatile Copper Market
The primary function of the secondary ingot producer is to make a specific brass or bronze alloy for industry or customer specification, said James A. Grodin, executive vice president, River Smelting & Refining Co., Cleveland, Ohio. "The industry exists because we can do this at a lower cost than the foundry can alloy internally. We are able to keep costs down by procuring the elements required from obsolete or production scrap."
But what happens in a period f a volatile copper market? Grodin pointed to specific list prices of brass ingot over a period of months when Comex prices soared. Where spot copper traded within a 60-cent range, the ingot list price moved within a 19-cent range."
Brass ingot pricing, he said, is based upon the competitive situation in the foundry industry "which is traditionally accustomed to long-term contracts with upside protection. It is very difficult to pass on price increases to the foundries." In volatile markets, also, there is extreme competition for raw materials. "In a strong copper market," Grodin noted, "the refiner has an advantage in his ability to extract copper and sell it against Comex pricing, thus realizing the highest market price for the metal." Brass ingot makers constitute a "tough industry," said Grodin, in which the strong have survived "and are structured for a prosperous future as the U.S. industrial manufacturing base strengthens."
The Overdone Plunge in Copper
"There is still a 'shortfall' in copper, and we believe the sharp plunge in metal prices may be overdone," said J. Clarence Morrison, first vice president and senior analyst, Dean Witter Reynolds, New York City.
Anticipating an increased production capacity between 1988 and 1992 of about 9 percent, Morrison expects a 10.5-million-ton output in 1988, which is still below normal levels. Production difficulties in Chile, Peru, Zambia, and Zaire may add to the problem. At the same time, world refined copper consumption should exceed new supply in 1988 and perhaps early 1989, assuming no recession, he said. As for inventories, Morrison noted, "We estimated in December that North American customer inventories were about 3 to 8 days domestically and 10 to 15 days abroad. Producer inventories represented 15 to 35 days." Total Free World inventories were around 400,000 tons, according to Morrison.
Therefore, if there is no recession and production problems abroad multiply, Morrison foresees "a producer price of $1.25 to $1.50 a pound." Even with "normal prospects of seasonal weakness in the third quarter, demand may be at least equal to the second quarter level." He also predicts a normal fourth quarter.
Superfund Threatens the Recycling Industry
"The most significant factor that will affect the price of copper in the United States over the next several years ... will be the survival of the domestic copper scrap recycling industry," said Henry L. Schweich, president of Cerro Copper Products Co., East St. Louis, Illinois. That, industry, which represents one-half of the domestic copper market, is threatened by Superfund, "a well-motivated, but poorly structured legislation of Congress." Schweich said that the scrap recycling industry has accounted for the consumption of an average 1.7 million net tons of copper scrap per year out of the 3.4 million net tons of total copper consumed per year since 1980. "Imagine the impact on copper industry prices if there were a major interruption of half of the domestic copper supply," he warned. Schweich discussed Superfund in detail and how it affects the recycling industry. "We simply must make the necessary changes in this badly structured legislation if we are to have a viable economy, clean up the land, and have a healthy environment," Schweich concluded. In the discussion afterward, moderator Larry Sax declared that "we could more easily accommodate ourselves to a lower copper price level than to the threat of the Superfund legislation."
The Master Alloys Industry
Michael H. Goodman, vice president, Metallurgical Products Co., West Chester, Pennsylvania, described the role of the master alloys industry as it relates to the overall copper industry. Goodman stated that copper base master alloys are a group of alloys that are added to a melt to arrive at the desired chemical composition, to impart specific properties, to remove unwanted impurities, and to deoxidize The alloys require careful control since they are extremely potent. "The production of master alloys," Goodman noted, "calls for a great deal of skill and accuracy." He focused on the use of phosphor copper, although he mentioned manganese copper, silicon copper, copper nickel, and chrome copper, as well as lesser known alloys such as boron copper and cobalt copper.
Copper's Price Swings
In a discussion of copper price swings on Comex and the LME during the past year, Vicki Santello, vice president-metals group, Elders Futures Inc., New York City, detailed the four stages of the bull market and its passage into a "corrective" stage. Santello noted that each stage had specific characteristics. First, volume picked up, newcomers came into the market, funds began to participate, and backwardation began; then, excessive liquidity occurred, margins began to change, and more fluctuation took place. Next, the market became more dramatic as the stock market plunged in October; finally, pressure built up, and the market became overextended.
The corrective stage, Santello said, was healthy and was reflected by the open interest and volume activity. The backwardation receded. However, Santello said, "There's still more room for correction." She sees the copper market moving sideways, somewhere between 90 cents and $1.00 a pound.
Low inventory, high consumption, and limited scrap supplies keep the copper market firm.