The Great Copper Boom is running on scrap

According to a Bloomberg report, traders around the world are betting on a post-lockdown economic rebound. One can see that in stock prices and oil futures—but also in the copper scrap piling up amid the twisted screen doors and burst radiators at Regional Metal Services’ processing plant off Interstate 75 near Knoxville, Tenn.

With the price of copper surging—it rose 26% in 2020 on the London Metal Exchange, to US$7,766 a metric ton on 31st December 2020 —more trucks full of discarded wire, pipes, and car parts have been showing up at operations such as those of RMS as sellers look to cash in. RMS buys the scrap and resells it as a cheaper substitute for the refined metal used in everything from autos to electronics. Garey Rittenhouse, the company’s president, says he frequently gets calls from smaller dealers, such as junkyards and electronic waste centers, asking whether they’re likely to hit a “jackpot” if they bring in metal today.

The copper boom has been fueled in part by voracious demand for commodities from China, which was hit first by the Covid-19 pandemic and has already begun to recover, and now by optimism that vaccines will allow the rest of the world to get back normal. The shift to greener technology is part the story too. For example, analysts at BMO Capital say that a typical battery electric vehicle contains 83 kilograms of copper, for everything from high-voltage wiring to rotors. That’s compared with 23 kg in an internal-combustion vehicle.

At the same time, there’s a threat of disruptions to the copper supply, which traders are betting will help keep prices high. Mines in Chile and Peru have kept up production, but running flat out with a workforce reduced by Covid restrictions. It’s coming at the expense of crucial mining activities such as maintenance and stripping of waste ore. Analysts at Goldman Sachs Group, Credit Suisse Group, and elsewhere have reiterated or boosted bullish copper forecasts in the past few weeks. “This current price strength is not an irrational aberration, rather we view it as the first leg of a structural bull market,” wrote Goldman Sachs analysts in a note.

But all that old metal flowing into recycling centers could undercut the rally, says Ed Meir, an analyst at ED&F Man Capital Markets. “Scrap remains plentiful and could be a significant source of supply, at least through next year,” he says. “This suggests any shortages we could see from the mining side could be offset.” Signs of ample scrap supply can be seen in the discount for so-called No. 2 copper, a grade of recycled metal, compared with the price for the primary metal. The discount widened to about 42¢ per pound, from less than 30¢ in July 2020.

Scrap wasn’t so common during past booms, says Meir. This time around, when Covid brought everything to a halt, the regular flow of secondary materials got temporarily bottled up. “What we’re seeing is that material that might have been held off is coming in,” says Mark Lewon, president of Utah Metal Works in Salt Lake City. He recently bought some bare bright copper wire, one of the most expensive grades of scrap, from a dealer in Wyoming that had hoarded materials since March 2020.

Scrap is a huge part of the copper business, accounting for about third of global demand, according to Andrew Cosgrove, a senior analyst at Bloomberg Intelligence. And it’s about to become even more important: China has recently clarified its import rules on scrap metal shipments, which should allow producers there to use more scrap instead of the pricier top-grade copper, known as cathode. That may be good news for anyone holding onto a lot of old pipes and tangled wire.

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