(Repeats with no changes. The opinions expressed here are those
of the author, a columnist for Reuters)
By Andy Home
LONDON, March 29 Has the copper price rally
which started so spectacularly late last year run out of
The London Metal Exchange (LME) price, basis three-month
delivery, hit a nine-month high of $6,204 per tonne last
month, since when it has churned in a broadly directionless
range below the $6,000 level.
This is all the more surprising given the severity of the
supply-side hits that have been grabbing the headlines.
The strike at the world's largest mine, Escondida in Chile,
has ended. But at 43 days it was longer than
expected and, factoring in a gradual ramp-up to full production,
is going to translate into some 230,000-240,000 tonnes of lost
output, analysts reckon.
The world's second largest mine, Grasberg in Indonesia, is
operating at only 40 percent of capacity due to an increasingly
acrimonious dispute between operator Freeport McMoRan
and the Indonesian government.
Cerro Verde, another huge copper mine in Peru also operated
by Freeport, is also seeing protracted strike action, albeit
with uncertain impact on output levels.
And yet the copper price seems uninterested.
This is, simply put, because there is a lot of the stuff
Global exchange stocks of copper have surged by around
167,000 tonnes so far this month to 750,000 tonnes, the highest
level since mid-2013.
Physical premiums everywhere are bombed out at extremely low
It all seems confusingly counter-intuitive until you factor
in a hidden supply surge in the form of scrap metal.
OUT OF THE SHADOWS
Scrap plays an important role in all industrial metal
markets but it is a notoriously opaque part of the supply chain.
Although it ends up being refined into new metal by big
operators such as Germany's Aurubis, its collection
and storage is handled by a host of much smaller entities, many
of them still family-operated even in the developed world.
That means there is much statistical darkness as to what is
actually happening in this part of the market.
But the surest signal is price.
Graphic on U.S. copper scrap pricing:
Scrap copper is priced as a discount to the primary copper
price, whether that be the one traded on the LME or the CME in
And those discounts flexed sharply wider when the copper
price rallied over the course of October and November last year.
According to assessments by S&P Global Platts, No.1 bare
bright, the highest-purity form of copper scrap, traded at flat
to the CME price in the second quarter of last year but flexed
out to a discount of nine cents per lb ($198 per tonne) in
The discount for No.2 scrap, typically containing 94-96
percent copper, followed the same pattern, widening from 20-21
cents per lb in the middle of 2016 to 40 cents at the start of
The price patterns imply a surge in supply, triggered by the
improvement in outright pricing.
Further evidence comes from China, the world's largest buyer
of copper scrap, just as it is the world's largest buyer of mine
concentrates and refined metal.
Scrap import volumes rose by 24 percent to 549,000 tonnes
(bulk weight, not contained copper) in January-February, a
noteworthy break of a long-running trend of falling imports.
And Aurubis itself, which is one of Europe's biggest copper
scrap processors, told analysts on its Q4 2016 conference call
that it is filled up with scrap until the end of the second
quarter of this year.
HOW SCRAP BALANCES THE MARKET
Everything points to a wall of copper scrap hitting the
market over the last few months.
And this is typical of how scrap supply behaves.
The small and fractured nature of the scrap supply chain
mitigates against sophisticated price hedging.
Rather, when the price falls, scrap dealers simply stop
selling, releasing accumulated stocks only when the price
recovers and they can sell at a profit again.
This collective behaviour means scrap supply dwindles in a
falling price environment and surges in a higher one,
effectively acting as a balancing mechanism on rapid price moves
in either direction.
It also directly impacts both copper production and
With better availability, copper refiners such as Aurubis
can lift the amount of refined metal they produce from scrap.
But many fabricators, such as brass and rod mills, also have
the ability to feed scrap directly into their product mix,
displacing some of their requirement for refined copper cathode.
They will only do so if the price is right. And with those
wide discounts still holding in the United States, the price is
Unlike the wall of mine supply that washed over the copper
market last year, this wall of scrap is much harder to track and
But one analyst, David Wilson at Citi, suggests that scrap
supply feeding into both the production and consumption sides of
the copper market balance ledger may increase by as much as a
million tonnes this year relative to last. ("Copper - miners
strike down any hope of a supply surge in 2017", March 28, 2017)
That eclipses Citi's calculation of 375,000 tonnes of mine
copper supply lost to disruption so far this year.
And even though Citi and other analysts are collectively
raising their "disruption allowance" calculations for global
copper mine supply this year, the impact would still be largely
mitigated by scrap if Wilson's estimate is anywhere near
But there is a sting in this scrap tale.
The current wave of scrap permeating the copper supply chain
is by its very nature a one-off phenomenon.
Once stocks of material accumulated during the weak price
environment of 2015-2016 are released, that will be it.
Until the effects are fully played out, however, scrap is
going to remain an important market balancing mechanism,
smoothing the anticipated transition from supply surplus to
supply deficit in the copper market.
(Editing by David Evans)