Downed wire

As of mid-February 2016, investors and economists were professing high levels of concern on several fronts and only restrained optimism. Fitting into the general mood was the status of copper pricing, which has fallen from its high of $4.58 per pound in February 2011 to slightly more than $2.00 per pound in mid-February.

Steadily falling copper pricing has presented one ongoing challenge for nonferrous scrap recyclers in the past two years, but a more worrisome aspect of the current market has been the curtailing of supply.

Even if the scrap harvested from demolition projects makes it to a smaller dealer’s location, that dealer may opt to hold onto it and wait for the price of copper to rebound before reselling it. However, any brass fixture, copper wire or copper tubing scrap that makes it across a scale and into the wider market will be appreciated in a hungry market.

Looking forward through 2016, red metal scrap sellers, processors and buyers will all be watching economic conditions and specific copper industry conditions around the world to try to determine whether either higher pricing or more robust scrap flows may yet bring some good cheer later in the year.

MATERIAL ISSUES

Quarterly and annual financial reports filed by publicly traded companies can help provide a snapshot of the decline in nonferrous scrap flows in 2015. These volume drops can be attributed in part to a decline in copper pricing that has slowed the flow of red metal scrap across scales.

The figures and accompanying statements issued by the public companies throughout 2015 and early 2016 repeat some common refrains:

• As part of the announcement covering the financial results for its first quarter of fiscal 2016, which ended Nov. 30, 2015, Irving, Texas-based Commercial Metals Co. (CMC) made reference to its nonferrous scrap operations. “During the first quarter of fiscal 2016, average nonferrous volumes declined 12 percent,” stated the company, which also noted that its “nonferrous metal margins were compressed by 22 percent relative to the corresponding period” in late 2014.
• In mid-November 2015, Sims Metal Management, based in Sydney and New York, issued a profit warning for its upcoming quarterly results and the first half of its 2016 fiscal year (covering the second half of calendar year 2015). Regarding its decline in scrap flows (both ferrous and nonferrous), the CEO and chief financial officer of Sims reported, “As a consequence of lower commodity prices, intake volumes for the first four months of the first half of fiscal year 2016 [covering July through October 2015] fell 26 percent versus the corresponding period [in the previous year].”
• Steelmaker Nucor Corp., Charlotte, North Carolina, which also owns Cincinnati-based scrap processing and trading firm The David J. Joseph Co., also issued an earnings performance warning for its quarter ending Dec. 31, 2015. The company did not specifically refer to volumes in its warning, instead stating, “We expect lower performance in the raw materials segment due to lower scrap and metallic commodity prices at our scrap processing businesses.”
• Fort Wayne, Indiana-based steelmaker Steel Dynamics Inc. (SDI), which includes scrap processing firm OmniSource Corp. in its portfolio, joined the other firms in warning of disappointing results in the final quarter of 2015. Regarding its ferrous and nonferrous metals recycling operations, SDI stated, “Financial results are expected to decline to a loss position for the fourth quarter 2015, based on lower shipments and metal spread compression.”

Managers of family owned scrap companies contacted by Recycling Today (sister publication to Construction & Demolition Recycling) report nearly identical conditions, with recyclers from different regions of the country all seeing similar volume reductions.

When scrap generators and smaller dealers hold onto supply, it is most often with the hope that prices will rise, in part in response to the newly created shortage of material.

For prices to rise in a sustained way, however, demand for red metal scrap will have to at least be stable and ideally gain momentum. In the broader picture, the supply of mined copper will likewise have to become tighter relative to global consumption and demand.

Whether that is in the cards is difficult to say. Domestically, the U.S. economy may prove to be a stable source of copper consumption and red metal scrap demand, although it appears red metal scrap consumption figures will be down in 2015. On the international front, the forecasts for China in particular are highly skeptical.

ON THE HOME FRONT

In 2014, wire rod mills, brass mills and other red metals producers combined to consume 945,000 metric tons of copper-bearing scrap, according to data gathered by the United States Geological Survey (USGS), Reston, Virginia.

In the first nine months of 2015 (the most recent time period for which data is available), these domestic consumers had melted 669,000 metric tons of scrap, putting them on pace to consume an estimated 891,000 metric tons by the end of the year.

That 5.7 percent decrease may partially be the result of a lack of scrap availability. Although China is buying less red metal scrap from the U.S. than it had been in earlier years, the dwindling supply of scrap has caused consumers around the world to consider their alternatives.

While U.S. copper and brass mills and refineries used 5.7 percent less scrap in 2015, they actually increased their consumption of refined copper, according to USGS data.

Based on the pattern in the first nine months of the year, domestic mills and refineries were likely to consume 1.89 million metric tons of refined copper in 2015, signaling a 7.4 percent increase compared to the 1.76 million metric tons consumed in 2014.

U.S. wire rod mills likely will increase their refined copper consumption by 8.1 percent while refined copper intake by brass mills will tick upward by 7.2 percent.

Overall production figures at such facilities have enjoyed relative stability in the U.S. in 2014 and 2015, as the nation’s automotive and construction sectors have enjoyed steady sales and moderate growth, respectively.

In the construction sector, Ken Simonson, chief economist, Associated General Contractors (AGC), Arlington, Virginia, reported in the first quarter of 2016 that “every type of construction has outperformed its 2014 pace through the first 11 months of 2015.”

Private residential spending increased 10.8 percent over the 12-month period from December 2014 to November 2015, while private nonresidential construction spending rose 13.6 percent during that timeframe.

The consumption of building wire globally, which was 1.03 million tons in 2014 according to the CDA, has a long way to go to reach the figure of 1.7 million tons attained in 2005. While a U.S. construction rebound may be helpful in seeing that number climb back up, when it comes to building booms and copper wire demand this century, activity in China will likely drive the copper market in 2016.

THE OUTSIDE WORLD

Economists venturing into the forecasting realm for 2016 have uniformly pointed to China and its ability to maintain gross domestic product (GDP) growth as a key to determining how commodity prices will trend in the coming year.

When China’s secondary nonferrous metals industry gathered in Ningbo, China, in November 2015, for the annual convention of the China Nonferrous Metals Industry Association (CNIA) and its Recycling Metal Branch (CMRA), the impact of China’s “new normal” economy was a repeated reference point by speakers who took the podium.

Representatives of the CNIA and CMRA warned that the “new normal” economy of China likely means an end to rapidly growing metals production capacity. Ren Xudong, executive vice president of the CNIA, portrayed a mixture of good and bad conditions for nonferrous metals producers.

Many of the base metal sectors, Ren said, have an excess capacity issue and “prices are in a downturn both at home and abroad.”

Figures for secondary metals production in China for the first nine months in 2015 showed aluminum output up 5.5 percent and lead up by 15 percent. By contrast, secondary copper production had dropped by 7.1 percent, according to Ren.

The figures likely reflect the health of the Chinese automotive industry, which consumes aluminum as well as lead in the form of lead-acid batteries, versus its building industry, where less copper and brass have been needed.

Wang Jiwei, vice president and secretary general of the CMRA, said the “new normal” of slower economic growth in China made 2015 a difficult year for producers, with “capacity rates of some enterprises [being] less than 50 percent.”

During China’s 12th Five Year Plan era from 2011 to 2015, major investments in nonferrous production created facilities capable of producing up to 750,000 tons per year of copper or lead in one place.

The five-year timeframe also will have witnessed China having brought in some 33 million tons of imported nonferrous scrap, according to Wang.

USGS figures, obtained by the U.S. Census Bureau, show China’s demand for copper-bearing scrap from the U.S. having fallen significantly in 2015.

China imported 727,000 metric tons of copper-bearing scrap in 2014 and the nation was on pace to import 674,000 metric tons in 2015, representing a 7.3 percent drop.

The ability of copper and brass producers in China to maintain similar buying volumes in 2016 will depend largely on whether the nation’s leaders can successfully maintain GDP growth without relying on as many major massive infrastructure products or the propping up of bloated state-owned enterprises.

For scrap recyclers, the events in China are just one of many factors that will affect how much red metal crosses their scales in 2016 and what price range they can expect.

The author is an editor with the Recycling Today Media Group and can be contacted at btaylor@gie.net.