Wednesday, April 21, 2021

Copper: "Record copper scrap flows this year won't plug deficit"

 Recycling in metals can trip up the analyst unless they have a mental matrix to hang this stuff on.

The classic example is silver at the time digital cameras—this is pre-iPhone, so just cameras, were making inroads, 2003 or so. There were supposedly serious people making the argument that, as digital took over, the the 250 million ounce demand from the photographic film market would disappear and the collapse in that demand would crash the silver market.

What wasn't factored into the bearish pitch was the fact that recycling of silver from film was so efficient that for the Kodaks and Fujis of the world it was essentially a closed cycle, that over 90% of that quarter-billion ounces was supplied from the recyclers, meaning the dramatic fall-off in film use had no appreciable effect on the larger silver market and thus we got this price action, 2002 - 2011:

I've mentioned:

In late 2003 I was visiting a very smart silver trader, with the shiny stuff around $4.10 and the conversation went from the most leveraged long we could think of to the trans-Pacific silver trade from Potosi and Mexico to China and thence to the valuation of China's currency and without even pausing for breath he said it was overpriced by 40%.

That little tidbit made its way into the dusty old "If this happens then do this" file, along with the Tokyo earthquake plan* and the eruption of one of Iceland's big volcanoes at a Volcanic Explosivity Index of 6 or larger....
Well, the silver trade worked out, but maybe not as well as I remembered. This chart from SD Bullion says silver never traded at $4.10 in 2003 and that, for the period in question, October, it was actually around $4.80:
Silver Prices 2003 chart history SD Bullion

The chart is for the daily silver fix which is physical and we were in futures so the shiny stuff  may have been cheaper in the derivative but not that much cheaper.
Fortunately Ag did crack $8.00 by the end of March 2004 but because of the higher entry price my fond memories of a double in the underlying didn't happen.

That's the funny thing about memory as you get older, the more recent the event the more prone to error, assuming the event has crossed the divide from short-term to long-term memory storage.
Potosi in 1575* on the other hand, I remember like it was yesterday.

From Aeon:....(last seen in "The First Global City")

And with that longer-than-usual introduction here is the headline story from Reuters, April 21:

* Citi expects demand to grow 6.5% this year

* Neither mine nor scrap supply expected to balance market

Supplies of copper scrap will jump this year due to decade high prices, but are unlikely to come fast enough to meet robust demand, leaving shortages that are expected to trigger stock draws and further price gains.

Copper prices around $9,400 a tonne are close to $9,617 hit in February, the highest since August 2011 and more than double the levels seen in March last year, when manufacturing activity crashed due to COVID lockdowns.

Scrap typically accounts for about a third of global copper supplies at around 30 million tonnes, but quantities tend to vary according to prices.

“Scrap supplies are unlikely to rise as quickly as the market needs, given logistical constraints and an 8-month lag between price strength and copper scrap coming to market for processing,” said Citi analyst Max Layton.....