* Chinese interest muted since return from Lunar holidays
* Unattractive spreads create more hand-to-mouth business
* U.S. exports dry up; domestic business perks up
By Chris Kelly
NEW YORK, March 10 (Reuters) - Chinese customers have begun to retest the waters of the U.S. copper scrap market following a prolonged hiatus, but are holding out for deeper discounts before they commit to buying significant tonnage.
“The Chinese are testing the waters and trying to do some business, but they do not want to move ... the spreads are not where they want them to be,” said a Midwest trader.
Facing rising costs of labor and soaring energy prices, some fabricators in China are having trouble covering production costs, making the spread between purchased raw materials and finished products unprofitable for many.
This has substantially slowed U.S. copper exports to China. The world’s biggest consumer of the red metal imported 10 percent less copper in February than it did a year ago.
“If they can’t buy scrap at the spreads they want, they will go to the Shanghai market and buy it from there, and they are probably better off for it,” said one Midwest trader.
Some holders of bonded copper in Shanghai are offering the metal at below spot London Metal Exchange (LME) prices, a scenario that could further swell warehouse stockpiles. [ID:nTOE72707A] (Graphic: link.reuters.com/deg67n )
“The Chinese are only buying what they need. Some of my customers’ orders are coming in at 100 tonnes an order, whereas before, that would have been 500 tonnes an order,” said one Southern scrap merchant.
China’s clamp down on credit during the second half of 2010, and record-high copper prices in the United States and London, curbed the metal-consuming giant’s appetite for scrap, allowing more U.S. exports to make their way to Europe. [ID:nN29457287]
But European demand for U.S. material has slowed in recent weeks, dealers said.
“Europe now has their belly full and doesn’t seem to want any new material for the next month or so, whereas China is starting to poke their heads in,” said Matthew Heitmeier, director of non-ferrous metal marketing with Louis Padnos Iron & Metal Co.
With a less-aggressive Chinese consumer for U.S. scrap, a stand-off between the two sides has emerged in recent weeks, substantially slowing U.S. copper exports to China.
February trade data reflected this, with Chinese imports of copper scrap amounting to only 250,000 tonnes in February, down 30.6 percent from the previous month and 10.7 percent from year-ago levels. (Graphic: r.reuters.com/fez48r )
“I’ve only had one Chinese buyer that is willing to pay close to the formulas that I am getting from the domestic guys ... everybody else is dramatically lower,” said one East Coast scrap dealer.
“The Chinese are looking for much deeper discounts, so all of my copper has been going domestically.”
The Midwest trader concurred, citing an improved domestic market for Bare Bright copper, often regarded as the highest grade of scrap.
“The domestic market is solely Bare Bright, and that market is steady. There is even some push, depending on who you’re talking to ...what mill, what location ... for some more tonnage for March, even before the second quarter.”
As a result, spreads for Bare Bright were being quoted at a 14- to 25-cent discount to the COMEX May contract HGK1, unchanged from the beginning of the year.
No. 2 copper scrap, which typically consists of a mixture of wire and tubing with a 96 percent copper content, was quoted at 60 to 80 cents under, relatively flat from January levels.
Despite the lull, most market participants still expect China’s demand for the red metal to grow as the year goes on.
“If it’s there, they will buy it. I think that demand for basic raw materials from China will continue to be steady .. there is no doubt about it,” said Robert Stein, vice president of nonferrous marketing and trading with Alter Trading Corporation in St. Louis, Missouri.
“Clearly they need it. It’s tough to make copper tubing, or copper sheet, or copper wire by feeding your furnace full of air, so the scrap is going to flow to its best market and if the scrap isn’t there, cathodes will replace it.” (Reporting by Chris Kelly; Editing by David Gregorio)