Scrap scarcity hits price of copper

The supply of copper is usually associated with the image of huge open pit mines in Chile and elsewhere. But there is a lot more beyond the dirt of the excavations.

The so-called "urban mine" – copper scrap – supplies a quarter of the world's consumption of the red metal, much more than any single country, including Chile. Lured by record high prices, scrap supplies had been readily available in recent years to feed voracious demand in developing countries, particularly from China. But not any longer.

"Scrap has fallen off a cliff," says one mining executive who asked not to be named. "There have been dramatic losses," he adds.

Ian Walker, a scrap trader based in Santiago who sells mainly to India, talks about "real carnage".

The turnround in scrap is one of the reasons behind the surge in copper prices so far this year, as consumers tap into tight supplies from the mines to replace the loss, according to a view widely held among participants at the world's biggest conference on the red metal which ended on Sunday in Santiago, the Chilean capital.

Copper prices on Monday surged to a five-month high of $4,459 a tonne, up 43 per cent this year. The rebound in prices may prove short lived, however, should they again begin attracting flows of scrap, traders say.

The fear of fresh scrap flows was behind the gloomy chatter at the conference, even if executives said that the current price above $4,000 was surprising but most welcome, considering the world is facing its worst recession since the 1930s.

"Scrap is the first swing producer in the copper industry," says an executive from one of the world's biggest miners of the metal. "It is always the first supplies to be lost when prices are too low, and the first to recover when prices are higher."

Scrap accounted last year for up to 8m tonnes of the world's demand of 23m tonnes and executives believe that at least 1m tonnes of scrap are missing now. When copper prices were riding high, scrappers smashed everything from electrical wires to toy cars. With copper surging to a record high of $8,940 a tonne last year, even robbery was rampant as thieves were lured by quick returns reselling copper as scrap. But as prices fell to a four-year low of $2,827 a tonne late last year, copper recycling – and burglary – have slowed considerably.

China is the world's biggest buyer and consumer of copper and gets a quarter of its supply from scrap – some of it domestic scrap, but also large imports of scrap from the rest of the world, according to industry estimates.

Now that there is less scrap around, Beijing has been forced to to buy more refined copper than usual from world markets, helping to push prices higher. Stockpiling by the Chinese government's secretive State Resources Bureau (SRB) has been the other key factor driving prices higher so far this year, traders add.

Adam Rowley, metals analyst at Macquarie, says that China was importing an average of 460,000 tonnes of scrap a month last year, but that has slumped to less than half, or about 200,000 tonnes, at the start of this year.

"Taking a 30 per cent copper content in that scrap, that means imports have dropped from 140,000 tonnes a month of copper content to 60,000 tonnes," he says. "So that's a big part of why [copper] refined imports have picked up, to replace all this scrap which is suddenly becoming very tight," he added.

Michael Widmer, a metal analyst at BNP Paribas, adds that reduced scrap availability will pose a challenge to refined copper production. "Fabricators, which are significant scrap users have increasingly to revert to the usage of refined copper," he says, warning: "We believe that reduced scrap availability is one factor supporting copper prices at present."

Mr Rowley says that the key issue is whether these scrap imports will start to pick up again. "We are already hearing of very aggressive buying in the US by Chinese traders and my fear is that you are going to see some increase in these scrap imports over the next few months," he says.

If his forecast proves right, prices could drop soon. Hussein Allidina, head of commodities research at Morgan Stanley, is betting prices will drop 18 per cent. "Real end-demand conditions have not improved," he says. Jeremy Goldwyn of Sucden, a brokerage, adds: "I don't think the current strength of the market is sustainable or justifiable on the true fundamentals." He sees prices moving "sharply lower in the coming weeks and months".

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