Viewpoint: Copper scrap spreads trend weaker

Copper scrap is poised to maintain weaker spreads through the end of 2018 amid unchanged supply-and-demand fundamentals.

Lower-than-expected demand, in part driven by uncertainty in top consumer China, and increased availability of scrap have weakened spreads on bare bright scrap so far this year.

Bare bright spreads for 2018 have averaged 11-13¢/lb under the active month metal price year to date, widening from the 2017 average of 8-10¢/lb under. They are expected to maintain that trend.

Still, some dealers expect spreads to narrow with the lower Comex price because delivery into yards will likely tighten. But the current abundance in available supply will be a limiting factor.

The average Comex spot price for the first half of 2018 came in at $3.1149/lb, well above the 2017 yearly average of $2.8053/lb. The LME cash price has averaged $6,917/t for the first half of 2018, up from last year's average of $6,166/t.

But prices have since dropped lower than expectations, with the current most active price around $2.70/lb and the outlook for the rest of the year uncertain amid mounting global trade tensions.

Higher freight rates as a result of tight truck supply will also continue to be a thorn in the side of dealers and brokers, putting downward pressure on spreads for the second half of the year.

Copper cathode premiums are anticipated to be strong for the second half of the year after starting 2018 in the 5-5.75¢/lb range, despite lackluster spot demand. Higher freight has put a tailwind behind the premium.

Some dealers have even offered sales of cathodes with slightly lower premiums, with consumers doing their own pickups. Current premiums are in the 6.5-7¢/lb range but dealers will continue trying to push premiums higher to cover freight costs.

Should US demand hold, future scrap spreads will depend on the number one consumer of copper, China, and the global marketplace for the second half of 2018.

US scrap flows to China dried up in early May because of the suspension of state-affiliated China Certification and Inspection Group North America (CCICNA) inspections of US shipments for a month beginning 4 May. The future remains unclear as inspections in China have been taken over by China's customs authorities.

The latest move is in tandem with China's general crackdown on scrap imports and amid the unfolding trade conflict between the US and China.

Besides concerns over China's slowing growth, deteriorating trade relations and geopolitical concerns may play a role in spreads for the second half of the year. The mounting trade dispute between the US and China has not yet had a pronounced impact on the global economic outlook.

On the supply side, world copper mine production is expected to grow by around 3pc and remain unchanged in 2019 following a decline of 1.5pc in 2017, the International Copper Study Group (ICSG) reported.

World refined production is expected to increase by around 4pc in 2018 with lower growth of about 1pc for 2019, ICSG said.

The ISCG reported the world apparent refined usage is expected to increase by 3pc in 2018 and 2.2pc in 2019. Projections indicate a small surplus of about 40,000t for 2018 and a deficit of around 330,000t for 2019.

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