US copper chopping capacity growth leads to oversupply

New copper wire chopping capacity that came on line in the US over the last two years sought to convert an abundance of insulated wire into exportable, higher-quality grades in response to tougher scrap import standards from key consumer China.

But the onslaught of new chopping capacity has caused supply to surpass demand in the wire and cable recycling sector. Over a dozen new full-scale chopping lines have begun operating in the US in the last year, according to market participants. That brings the number up from the 70 chopping lines operating in North America as of 2017, 63 of which were in the US, according to a survey by Recycling Today.

"New chopping lines have come on board in the last year or two, but quality, consistent feedstock and volume is challenging for the new guys which gives the current choppers their primary marketing advantage," a scrap broker said.

An estimated additional 20-30 medium-to-small scale choppers have also joined the market, but are understood to be operating more sporadically.

Choppers are now trying to sell excess supply in the face of tepid US demand and Chinese import restrictions. Domestic consumers, such as brass mills, have been bombarded by offers from processors looking to move material, leading to lower prices.

Copper chop prices have weakened in 2019, with spreads for domestic and export #1 chops as assessed by Argus falling from an average 12-11¢/lb under Comex, respectively, to 17-16.5¢/lb under in late July. Spreads for #2 chops designated for an Asian port have softened even further from January's 34-33¢/lb under to 44-41¢/lb under.

And with the readily available material has come quality issues. Some US mills have increased rejections, forcing them to look elsewhere to secure needs.

Dealers are under the impression that consumers are scrutinizing the loads more as business slows and scrap is readily available. Consumers may be more selective with more domestic supply to choose from, but believe that the bigger issue is that lesser quality chops that had gone overseas are now trying to find a home in the US along with the new choppers that are still trying to get the process down.

"New chopping lines…are finding out the hard way that making perfect brass mill chops is not so easy," a scrap broker said. "In some cases, the scrap companies have already thrown in the towel."

Chopping for China

North American wire and cable processors traditionally concentrated on recycling higher-quality copper chops scrap into even higher-copper content material in the last two decades as the lower grades were exported to China.

Lately, China has moved to restrict or ban some forms of scrap from entering its borders, so dealers have looked for new domestic homes or are refining the scrap to a cleaner form in order to sell to Chinese customers.

At the start of 2019, China imposed a ban on imports of "category 7" scrap metals as part of an environmental-friendly policy designed to reduce pollution. The banned category includes copper cable, halting the flow of that material, which is comprised of tightly wound threads of wire, to the world's largest scrap metal consumer and leading to rising stockpiles in the US.

US copper scrap exports to China continue to decline amid tariffs and stricter quality standards from the major consumer. June exports to China fell by 40pc year over year to 8,538t, according to the latest trade data from the US Commerce Department.

China's restrictions forced US scrap dealers to reassess their options when figuring out how to clean up scrap for a wider audience. This included smaller dealers buying equipment to produce chops, which are chopped-up wire strands, for the first time and upgrading copper by getting rid of insulation and plastic from the abundant insulated copper wire (ICW) that is now harder to export.

One of the key drivers for the investment into wire chopping is speculation that China could re-categorize chops as a raw material as opposed to scrap or "solid waste" as per the Chinese central authority's current definition. If this re-categorization takes place, there would be no restriction on China's imports of chops.

More to come?

Copper chops are made to remelt and be used as an addition for casting copper bearing alloys and provides a higher copper content re-melt recovery rate. Higher quality and heavier gauge chops can also be used to replace copper cathodes at a discount and may make international consumers able to take the converted form of the banned ICW.

Chopping and separation equipment is costly, as each new line can run into several million dollars, leaving little margin for error for dealers looking to profitably transform the scrap to a higher quality material — particularly as processors face weak prices for most nonferrous and ferrous scrap grades.

The cost of converting copper wire and cable varies depending on what goes into the chopping line. The lower the grade, the more time it takes to process and adding costs to convert the material.

Despite the issues that yards need to work through, participants believe that more chopping lines will be added because of the fundamental shift in buying from China.

"A few people have tried it, failed and sold out," a dealer said. "But I think there are twice as many chopping lines from five years ago with more on the way."