September/October 1992
"Will there be enough copper supplies when demand picks up?" copper executives wonder. Unfortunately, the answer is far from clear.
BY SI WAKESBERG
Si Wakesberg is New York bureau chief for Scrap Processing and Recycling.
During the hot and humid days of July, copper prices on the Commodity Exchange Inc. (COMEX) (New York City) rose along with the temperature, jumping to an astonishing $1.15 per pound—an 18-month high. Unfortunately, along the with higher prices came the specter of supply disruptions. While most of these potential problems have been averted, they nevertheless reveal undercurrents of market volatility and vulnerability. Some copper executives, in fact, are beginning to wonder whether an economic revival may not lead to a serious squeeze on copper supplies, both primary and secondary.
One of the reasons for their concerns is that which seems to be helping to push prices up: uncertainties about labor negotiations at several copper producers. Asarco Inc. (New York City), for instance, avoided a labor shutdown at its facilities, but the mere threat was enough to contribute to the copper market rally, industry officials say.
The Asarco incident has prompted copper market observers to examine the dates when labor contracts at other North American copper producers are set to expire. Here's what they've found: Cyprus Minerals Co.'s (Denver) labor contracts are up at the close of 1993; Noranda Inc.'s (Toronto) contracts expire at Horne, Quebec, early next year and at Gaspe, Quebec, in 1994; Phelps Dodge Corp. (Phoenix) faces labor talks in Chino, N.M., in 1993 and at Tyrone, N.M., in 1994; and Copper Range Co.'s (White Pine, Mich.) facilities in White Pine come up for labor negotiations in 1993, as does Kennecott Corp.'s (Salt Lake City) Bingham Canyon, Utah, property.
One analyst, viewing these upcoming labor talks, says: "It appears that settlements are in sight with a minimum of disruption." Other copper experts are not as reassured. Bette Raptopoulos, vice president and senior metals analyst for Prudential Securities Inc. (New York City), notes, "The market has become extremely vulnerable to potential supply constraints."
Shutdown threats have also appeared across the Atlantic, where, in late July, the powerful Polish unions went on strike at mines owned by Kombinat Gorniczo-Hutniczy Miedzi w Lubinie (KGHM) (Lubin, Poland). One look at some figures shows how this might affect Western copper supplies: KGHM produced approximately 348,000 metric tons (mt) of copper in 1991, of which about 245,000 mt was exported to the West.
More Causes for Worry
In addition to labor concerns, other flashpoints have added to market unrest. In the United States , a rail strike was halted by court order, but its ripples still spread through the market. Work stoppages in Peru as well as furnace blasts and mine explosions at the Chuquicamata, Chile, operations of Corporacion Nacional del Cobre de Chile (Santiago, Chile)—also known as Codelco-Chile—created anxiety and apparently helped to spur price runups in the red metal.
The general economic and political problems of some major copper-producing countries also have copper executives worried. In Zambia , a government spokesperson predicted that the country's economy will decline about 9 percent in 1992, instead of achieving a hoped-for 2-percent growth. This economic drop can be clearly seen in the production declines of Zambia Consolidated Copper Mines Ltd. (ZCCM (Lusaka, Zambia), which produced around 387,000 mt in the 12 months ended March 31, 1992, compared with 422,000 mt in the comparable period the previous year. This 8-percent drop is significant in that Zambia relies heavily on copper exports for its foreign exchange.
In addition, terrorist activities, insurgencies, and natural disasters in some countries, as well as purported incompetence and lack of long-term planning by some foreign producers have reportedly contributed to supply concerns—and could continue to do so. These aggravating problems are expected to continue to be very much in the spotlight as the industry moves into the mid-1990s.
As if these concerns weren't enough, the so-called smelter bottleneck—the shortage of copper smelting capacity to process mine concentrates—has also been troubling the industry worldwide, though it could be fading. In fact, Leanne M. Baker, vice president and mining analyst at Salomon Brothers Inc. (New York City), predicts that the smelter bottleneck will ease by the end of 1993. Her explanation: "First, existing smelters are implementing additions to capacity that are estimated to total 175,000 to 200,000 mt—the equivalent of one greenfield smelter. Second, custom smelters are increasing their rate of capacity utilization to take advantage of surging treatment charges. Even a 1-percent gain in utilization would add 75,000 mt of annual production. And third, smelters in the former Soviet republics are offering tolling arrangements that could alleviate the bottleneck further."
Still, the end of 1993 seems a long way off to some market participants, who foresee a year of frustration if the bottleneck continues. Others say the problem may extend well into 1994.
Consumption on the Rise?
All this anxiety about supply presupposes some upturn in world copper demand. Industry executives point to the summer's skyrocketing copper prices as a clear sign of growing consumption. "Why would prices move toward $1.15 a pound on COMEX if demand wasn't there?" asks one trader, dismissing conjectures about speculative buying. "Certainly the supply situation is not yet that stringent, although some of us expect it to get worse."
Some merchants, however, aren't convinced, particularly when it comes to international demand. "You get one strike threat, or one mine disruption, and it becomes a chance to push the market higher," remarks an international copper trader. "Business overseas is still slow," he points out, adding that "the situation in Japan remains weak." Reports from Tokyo in the first half of 1992, in fact, indicate that the recession in Japan has forced some copper importers to resell cargoes to Taiwan, South Korea, and China at a loss. A June report in the Journal of Commerce confirms this, noting that " Japan 's exports of refined copper increased to 7,966 mt in April from 4,502 mt in March." This "re-exported" copper presumably became competitive with U.S. copper exports into those regions.
Japan 's economic weakness is also evident in its drastically lower imports of copper scrap from the United States. In the first five months of 1992, Japan imported 18,764 mt of U.S. copper scrap, compared with 33,466 mt in the same period of 1991—a 44-percent drop, according to figures from the U.S. Department of Commerce (Washington, D.C.).
Despite the decline in Japanese demand, copper executives are optimistic that there will be a discernible uptrend in copper consumption in late 1992 and early 1993. One brass mill official says, "Volume-wise, we're up more than 20 percent, comparing the first five months of 1992 with last year." And Robert J. Garino, director of commodities for the Institute of Scrap Recycling Industries (Washington, D.C.), notes, "By virtually all accounts, the direction of U.S. refined and scrap copper consumption in 1992 is positive, even buoyant." Moreover, Douglas C. Yearley, chairman of Phelps Dodge, predicted earlier this year that Western World consumption would rise 1 percent in 1992.
Looking further ahead, Placer Dome Inc. (Vancouver, B.C.) notes in a report on copper-consumption prospects that "the decade ahead appears to be quite favorable for the vast majority of copper's end-use markets." The report shows strong growth for the metal in building wire; moderate growth in heating and cooling applications, motors, generators, and telecommunication equipment; and slow growth for automotive wire. The only declining market for copper is in plumbing, the survey asserts.
Yearley offers similar optimism, predicting that copper consumption will grow between 1.7 and 2.3 percent annually during the 1990s. The Far East will show the strongest growth, he forecasts, increasing its demand 30 to 34 percent, with China leading the way. Other executives add proof to his prediction, reporting that China 's burgeoning demand in recent months for both primary and scrap copper contributed significantly to the higher prices in July. In addition, Baker estimates that Chinese demand was "responsible for a 20-percent decline—or about 65,000 mt—in stocks on the London Metal Exchange" (LME) (London)."
In fact, unlike aluminum, which is burdened by huge tonnages in LME warehouses, copper stocks have been falling. While the LME had more than 340,000 mt of copper in warehouses at the start of 1992, those stocks had dropped 23 percent, to 262,000 mt, by mid-July. Should inventory levels continue to slide and demand regenerate, industry sources say, the copper market may be in for additional price volatility.
Expanding Production
In the midst of all the trepidation about copper availability, there are some indications that primary supplies may improve. For example, National Iranian Copper Industries Co. (Tehran, Iran) has reportedly been working to increase production at its Sar Cheshmeh facility, estimated to produce 100,000 mt of copper annually.
This move is indicative of what is going on behind the scenes in many copper-producing countries, particularly those that rely on copper exports for a major portion of their foreign exchange. Some other examples: In Zambia, ZCCM has indicated that it plans to begin feasibility studies on 12 new copper and cobalt mines. Meanwhile, Sumitomo Metal Mining Co. Ltd. (Tokyo) is reportedly assisting in the expansion of China 's Guixi copper smelter in Jiangxi province, which reportedly will increase the operation's blister copper output by 20 percent to 90,000 mt a year.
Furthermore, Outokumpu Copper Resources (London) says it expects to proceed with construction of a new mine in Chile. In fact, another report notes that Chile could boost its world market share from 20 percent to 26 percent by the year 2000, a move that would boost its copper output by 1 million mt a year. At least 60 percent of the increase would consist of fine copper in cathodes produced through leaching and solvent-extraction electrowinning.
The Scrap Squeeze
What about the scrap side? The copper scrap market is and has been in somewhat of a supply squeeze, but material remains available—at a price—and its availability is said to contribute to the stability of the overall supply situation. "In 1991, conversion of old scrap to refined metal and alloys provided 520,000 mt of copper, or 24 percent of apparent consumption, while purchased new scrap, derived from fabricating operations, yielded 775,000 mt of contained copper," according to the U.S. Bureau of Mines (Washington, D.C.). Combined, that's almost 1.3 million mt of scrap produced in 1991, compared with about 1.6 million mt of new copper mined. Of the total copper recovered from scrap, 35 percent went to smelters and refiners, 11 percent went to brass and bronze ingot makers, 48 percent went to brass mills, and the remainder was consumed by miscellaneous manufacturers, foundries, and chemical plants.
Scrap supplies play a vital role in the copper supply scenario, but never more so than when primary copper supplies are tight. In the event that planned primary production increases are delayed or never materialize, can the scrap supply be augmented? The answer, veteran industry members say, is Yes—when the market makes scrap a viable commodity.
So where does all this leave the copper market? Looking at the big picture, there are a number of unpredictable and contradictory market trends. Some are creating apprehension in trade circles—the smelter bottleneck, tight scrap supplies, potential labor disruptions, economic and political uncertainty in foreign countries. Other trends, however, are making industry members more optimistic—high selling prices, the potential for increased domestic demand, the possible re-entrance of Japan into the market, healthy buying by China, and planned production increases.
As one copper executive says, however: "If even now, when we are still groping our way through an economic recession, the copper price magnetically reacts to even the briefest supply interruption—to even the thought of a supply interruption—what will happen if we enter a period when demand resurges? What will the supply scenario be then?"
What, indeed. •
"Will there be enough copper supplies when demand picks up?" copper executives wonder. Unfortunately, the answer is far from clear.