April 27, 2009 / 8:02 AM / 9 years ago

Tight supply, strong Chinese demand top scrap focus

NEW YORK, April 27 (Reuters) - Aggressive buying by Chinese dealers has driven U.S. scrap metal prices to seldom seen premiums, but exceptionally tight supply in a stagnant economic environment has meant fewer and smaller deals to go around.

Scarce material is plaguing many scrap dealers who ramped up infrastructure, equipment and workers at their yards to handle an increasing flow of supply during the boom years.

But those same yards are now haunted by the debt used to buy those near-dormant shredders, crushers and truck fleets that threaten to drive them out of business, dealers said.

Those lucky enough to get their hands on caches of scrap can realize generous prices for their find, but much of the supply heads for China where buyers are notoriously fickle.

“China has a long history of feast or famine. Right now it’s a major feast. With little scrap being generated it’s generating a frenzy of buying,” said Matthew Heitmeier, a director at Louis Padnos Iron & Metal Co in Michigan.

This week scrap metal players of all types gather in Las Vegas for the Institute for Scrap Recycling Industry’s annual convention and these issues will top their discussion list.

Availability of old and new scrap metal has fallen dramatically in a relatively short period with the sharp and sudden drop off in manufacturing and building activity.

“Supply is an issue. Manufacturing is down and there’s no housing, no demolition work. So you’re not getting scrap. And there is big demand from China,” said Heitmeier.

In the case of copper, the lack of supply has meant an aggressive search for higher grade material that has been trading at a unusually high premium to cathode.

Veteran dealer Marc Kaplan, president of Mews Metals Trading in New Jersey, said he thinks the Chinese have been aggressively stockpiling lately after a quiet period of several months drove their inventories down.

“Believing the economic turnaround will be sooner rather than later, they want to be positioned with cheap inventory. So they’re buying everything and anything,” he said.

Pointing out that the copper price on the Shanghai Exchange is higher than the London Metal Exchange price, Warren Gelman, president of Kataman Metals in St. Louis, said he thinks Chinese buyers are taking advantage of the price differential.

Lower quantities of scrap has also prompted a change in the dynamics of the market. Previously, larger dealers would accumulate specific types of scrap from smaller dealers and send those shipments overseas. Now, they are sending mixed containers of whatever metal scrap they can find, putting copper, brass, and aluminum all in the same container.

Kaplan said he sells not only to China, but the whole Asian continent. Places like India, Taiwan, Vietnam and Korea will accept a container of steel scrap, for instance, to supply a small steel mill rather than a huge shipment.

“Because the price difference between Chinese scrap and the U.S. is so large, with very strong demand from major consumers to small speculators in China, they’ll pretty much pay whatever it costs to get it into a container,” said Heitmeier.

But that business could drop off as quickly as it arose if volatile copper price should fall, dealers said, many of whom are still smarting from the raft of bad deals during the swift and severe metal price declines in the fourth quarter.

Many dealers spoke of experiences where deals were struck while the metal was in the United States at one price and the other party tried to cancel, renegotiate or just walk away once it reached the port in China unless the seller dropped the price.

“Unfortunately, a lot of people in the scrap business were hurt because they gave credit to people they should not have. A lot of people had bad business practices,” said one dealer.

While some of the worst offenders are now known in the market and prices have fluctuated in a range for several months, dealers warn that a return of the pernicious practices could be possible if prices should fall again.

“If the price goes back down you’re going to see a return of some of that, because history repeats itself, especially when it’s recent history,” said one large Midwest dealer. (Reporting by Carole Vaporean, Editing by Richard Chang)

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