Commodities | Feb 19 2009
By Chris Shaw
As demand has fallen for commodities there has been a corresponding supply response, with mines being shut and projects shelved as companies attempt to deal with the new reality of tougher market conditions. But as Barclays Capital notes, what is often forgotten about with respect to the supply side response is the impact scrap metal has on market balances for a number of metals.
This is particularly the case for the copper market, where use of scrap is particularly sensitive to both the metal’s price and the level of industrial activity at the time. At present Barclays notes both are falling and as a consequence the availability of scrap in the copper market is falling quickly.
This is having the effect of reducing the amount of refined metal being produced from scrap, which in turn forces consumers to substitute scrap for refined metal in some fabricated products. Barclays notes in recent months the price of copper scrap relative to refined metal has risen strongly and scrap collectors are reporting large declines in quantities in year-on-year terms. As well, Chinese imports of copper scrap are estimated to have fallen by 25% in year-on-year terms in the December quarter last year.
While it is difficult to draw any definite price conclusions for copper from changes to scrap markets -given a lack of specific data- Barclays estimates scrap use fell by around 300,000 tonnes last year. In its view the market is underestimating just how significant potential scrap estimate adjustments could be for the copper market this year, which the group expects will play a role in limiting the overal size of the world’s refined copper surplus.
Barclays is currently forecasting this surplus will be a relatively modest 290,000 tonnes this year.
