Tracking Copper Trends

Si Wakesberg is a New York City-based consultant to the Institute of Scrap Recycling Industries (Washington, D.C.).

For the first time, the United States is exporting large tonnages of refined copper to the Far East, a prominent industry executive told a capacity audience at Scrap Processing and Recycling's Copper Roundtable, held in February in New York City. This was only one of many dramatic market developments noted by the speakers. Other trends mentioned include the role Eastern Europe will play in the copper market through the rest of the century, changing relationships between suppliers and customers, increased tightness of scrap supplies, and the challenges faced by brass and bronze ingot makers because of environmental restrictions.

The roundtable took place one week before the end of the Gulf war, but the recession appeared to be the major impact on the copper market, the speakers agreed. While copper prices have been holding at about $1 a pound, one merchant speaker predicted an average price of 94 cents a pound this year. A producer, however, optimistically viewed the market outlook as "favorable during the next decade," and the chief executive of a major scrap processing and consuming company said "the outlook is positive for increased consumption of copper scrap, both for direct use and for secondary refined production."

There is a continuing deficit in the world refined copper balance, observed John F. Champagne, vice president of marketing and sales, Magma Copper Co. (San Manuel, Ariz.). "The growth in refined output this year will not be enough to satisfy increasing levels of demand," he predicted. Though the deficits have been decreasing, he pointed out that they are persistent: "The series of deficits started in 1984, and we expect that 1991 will be the eighth consecutive year of these negative imbalances."

Champagne asserted that the deficit has been somewhat offset by draining available inventories, noting that in 1990, stocks on the London Metal Exchange (LME) (London) and the Commodity Exchange Inc. (COMEX) (New York City) were reduced to less than 100,000 tons. "Since then," he continued, "the steep backwardation has attracted metal to the exchange warehouses, but the current combined stocks of 200,000 tons are still well below historic levels.” Current stocks equate to about three to four weeks of demand-less than half the historic average, he said.

"The increasing demand for copper in the Far East has provided a natural market for U.S. refined copper exports," Champagne stated. In fact, he pointed out, demand in the Far East--"the world’s fastest growing market for refined copper"--exceeded 1 million tons in 1990, with Japan accounting for about half the total.

While Japan has doubled its refined copper consumption in the past 22 years, Korea doubled its demand in 7 years to the 1990 level of 320,000 tons, according to Champagne. Taiwan has taken 6 years to double its demand to 315,000 tons, he said. The combined demand from Southeast Asia--including Hong Kong, Singapore, Malaysia, and Thailand--exceeded 300,000 tons in 1990, twice the demand exhibited 6 years ago.

Champagne said that Far Eastern consumers "have given good reception to U.S. copper but have raised some questions about the stability of supply.” Nevertheless, he said, "U.S. copper will remain a major component of the Far East copper supply in the future.”

“Scrap generation is down in the United States because of the cyclical recession in the economy," explained Stanley A. Rabin, president and chief executive officer of Commercial Metals Co. (Dallas). On top of that, he noted, there's been "a significant long-term decline as a result of continuous casting, improved engineering, and higher yields in manufacturing." In addition, he pointed out, the supply of obsolete scrap has been depleted because of higher copper prices, which brought more material to the market, and the decreased availability of such items as green wire. As a result, “copper scrap inventories appear relatively low," he said. "Scrap supply abroad has also tightened."

Meanwhile, there has been a continuing strong demand from smelters, refiners, and brass mills, Rabin noted, and scrap exports have been firm. "Analysts estimate that American and Japanese mills utilize directly about one-third scrap, but mills will typically charge 60 to 100 percent scrap to produce billets for copper tubing," he said, adding that European mills appear to use directly a lower proportion of scrap.

Rabin observed several other trends affecting the movement of copper scrap:

Consumers are demanding better quality. Obsolete scrap will have to be upgraded, he said, because "manufacturers are focusing on minimum handling, high productivity, high yield, and lower operating costs."

Copper tube makers want to carry minimum inventories of raw material, so scheduled deliveries on a prompt basis are vital.

Import barriers have decreased, which could lead to diminished market protection. Rabin foresees higher exports to Europe, though not necessarily in 1991, and said that scrap exports to the Pacific Rim should continue to rise.

Rabin asserted that the major markets for copper tube will continue to be plumbing systems and air-conditioner manufacturers. "Near-term demand for copper tube will remain weak," he predicted, "but long-term consumption should grow moderately.”

For many years, copper companies in Eastern Europe paid no attention to market necessities or cost developments, instead relying on government subsidies, said Hans-Gerhard Hoffmann, commercial director of Huttenwerke Kayser AG (Lunen, Germany). This trend created production absurdities, he noted, such as in East Germany where "the production cost of 1 metric ton (mt) of copper reached approximately 100,000 [East German] marks. If the old East German currency had been convertible, this would have equaled $25 a pound!" He said that more than 2,000 miners produced 4,500 mt of copper in 1989 and that the government fixed a price at approximately $3 a pound.

Of the three copper smelters in East Germany, two were shut down last year for environmental reasons, Hoffmann said. "Only one smelter/refinery is still operating (in Hettstedt), with a capacity of 55,000 mt per year," he noted, adding that its operations are highly subsidized.

Hoffmann estimated that production shutdowns in the Soviet Union and Eastern Europe will result in a loss of approximately 240,000 mt of copper per year. "This is a significant figure," he stated, "with consequences for the worldwide copper market."

Last year, copper consumption in West Germany reached 900,000 mt, whereas East German consumption declined to 80,000 mt (from 170,000 mt). Still, Hoffmann predicted "a significant growth in copper consumption in the East." Environmental legislation is the major challenge to the secondary industry, he said, particularly in Eastern Europe, which has paid little attention to environmental problems. Hoffmann discussed the cost of environmental cleanups, asserting that the problem is now an international, not a local, one. The world must be viewed as one marketplace, and metal companies must think and act internationally, he asserted.

The Soviet Union substantially increased its export of copper cathodes to Western Europe in 1990, Hoffmann reported, which has led to "a shortage of metal inside that country." The Soviet copper fabricating industry's output has been affected by this lack of supply, as well as by poor transportation and political infighting, he noted. "Soviet states want to create their companies in local state ownership, whereas central Soviet authorities want to maintain control."

Relationships between suppliers and customers are undergoing substantial changes, said Harlan M. Echtenkamp, manager of copper and nonferrous metals operations, General Electric Co. (Bridgeport, Conn.), who noted that "more than 50 percent of all U.S. copper consumption goes into electrical applications, including those in nonelectrical industries such as building construction, transportation, and industrial machinery." While the traditional approach in supplier-customer relations has been to award business to the lowest bidder and for a limited period, the drive today is toward "the complete satisfaction of the end-product customer and not price or delivery of a single material or component of the end product," Echtenkamp said.

To keep up with this trend, he suggested, suppliers and their customers should consider the following questions:

Are my suppliers my adversaries or my partners?

Is my supplier a leader in technology and low-cost production?

How can I reduce the time between placement of customer orders and shipment of the product by the supplier?

How can I keep the lowest inventory in my system and how can my supplier help?

How can I measure the total cost of a purchased product? Echtenkemp cited a recent study that showed that the cost of negative values-such as quality failure, late deliveries, and reworking-add as much as 70 percent to the supplier's price.

Current copper demand is lower than it has been in recent years, which has resulted in more copper pressing on the market, said Joseph Robertson, executive vice president of MG Metals Corp. (New York City). Therefore, he said, prices are expected to average lower--under $1 a pound--in 1991. In fact, he predicted an average price of 94 cents a pound this year.

Reviewing the past three years of the copper market, Robertson noted that the backwardation found on the LME and COMEX continued longer than expected and that world production problems, late shipments, and low inventories caused COMEX values to move sharply higher in March 1990. Meanwhile, the spread between LME and COMEX prices widened, and as COMEX values slipped from their March highs, metal began to flow out of the United States to the LME, he observed. At the same time, the Far East began to buy U.S. cathodes more heavily. "That buying has continued into 1991," he said. Like Champagne, Robertson foresees dramatic structural variations in the world copper market as a result of the changes in the international flow of copper.

"Currently, there's too much copper around," Robertson said, noting, however, that prices have held around the $1-per-pound level. With consumers booking less refined metal in 1991, increased spot buying may help underpin this year's market, he concluded.

Polling the brass and bronze ingot industry membership, Allan B. Silber, president of the Brass and Bronze Ingot Manufacturers Association and chairman of the Recyclers of Copper Alloy Products (Re-CAP) (both in Nashua, N.H.), found that most believed "overall shipments should show a slight decline [compared with] 1990." Silber insisted that "we must cut back the continued expansion of imports, both finished and semifinished, that have pervaded the U.S. market."

Environmental issues are the major challenge to the industry, he noted, specifically proposed lead-reduction legislation and regulations. He recounted Re-CAP's efforts to lobby against the Lead Reduction Act of 1990, including meetings in Washington. "Certain provisions of the bill [SB 391], particularly the proposed prescriptive 2-percent limit for brass plumbing fittings, would ... shatter a viable and active segment of our vitally essential recycling effort ... and have severe economic impact on many domestic industries, opening them to foreign domination," Silber asserted.

For scrap processors, the 2-percent limit would mean that ingot makers would use only 25 percent--at best--of the radiators now being used to produce the 6-to-8-percent alloys. "That's 75 percent less radiators," Silber contended. "In fact, some people say they wouldn't use radiators at all to produce new alloys."

Daniel C. Gascoyne, Frank H. Nott Inc. (Richmond, Va.) and chairman of the Institute of Scrap Recycling Industries's (ISRI) copper subcommittee, introduced the speakers and served as roundtable moderator. He was assisted by William Rickher, Cerro Copper Products Co. (St. Louis) and cochairman of the copper subcommittee.•

Executives at a recent Copper Roundtable heard an earful about the many dramatic changes unfolding in the world copper market.