Cover your ...

Copper scrap continues its climb, blowing past all historic highs. With prices at record levels, the bullish mood continues. While confident of the underlying strength in the copper market, most recyclers acknowledge that prices have gone too high and that an inevitable retrenching of prices is in store. The question that continues to plague the industry is how sharp the fall will be when prices turn.

Hedge funds are playing a more active role in the market. These financial houses are buying and selling a host of secondary commodities, perhaps separating the metals from the supply and demand realities of the market.

The growing presence of hedge funds in the nonferrous metals markets is also making it more difficult to read the proverbial tea leaves. The volatile swings in nonferrous metal markets, some scrap dealers say, can be attributed to these financial houses, which are said to be driving markets away from the actual physical market to a speculative market.

Domestic secondary smelters say they are finding it more difficult to justify paying ever-increasing prices for the material. At the same time, the offshore market, especially China, continues to show conflicting signals.

For some secondary smelters, an earlier plan to purchase copper scrap is becoming more challenging. One scrap dealer in the Midwest says that domestic smelters are reporting that they have full inventories and are not in need of excess material.

While some industry observers might conclude that some domestic consumers are looking to drive prices down, several handlers of copper scrap note that these consumers aren't looking to take in more material at lower prices. A slowdown in manufacturing could result in reduced demand for raw material.

Copper scrap is not the only material showing continued strength: Aluminum scrap has been following a similar arc, albeit not as sharp. While prices have been on a strong upswing, some of the fundamentals for the grade are becoming murkier.

The domestic auto industry is casting an ever darkening cloud on the market. The economic problems of General Motors and Ford Motor Co. have created uncertainty about the auto industry in the United States. For many smelters and aluminum scrap consumers, the problems with these two auto giants are resulting in sluggish order books, pushing demand for secondary aluminum down at some of these facilities. Additionally, a number of casting plants in the United States have closed in light of end market concerns.

Along with the problems in the domestic auto industry, a slowdown in home construction also plays into concerns that aluminum scrap could be topping off. However, despite these issues, the overall outlook for the aluminum market still remains strong.

The somewhat bullish outlook for secondary aluminum is not limited to the United States. Several vendors in Europe and Asia say that aluminum, looking forward, should remain fairly healthy.

One UK.-based scrap dealer says that aluminum, which has been relatively steady for some time, looks to continue to strengthen, as demand in that sector is coming from a number of consumers, including the automotive sector.

"As the market progresses, we see more consolidation within this scrap metal industry worldwide, but obviously hope that the medium and smaller merchants will survive to give the service to their customers and factories that they are so good at," the U.K. recycler says.

With these swings affecting nonferrous markets, many scrap dealers fear that prices could drop quite sharply in a short time. Copper, which has surged far past any historical norm, could decline by 10, 20 or 30 cents, if not more, in a short time and still be priced far higher than it was years ago.

Along with the greater role that hedge funds are playing, China continues to be very active in the secondary copper market. As a result of this activity, copper scrap is becoming harder to get a hold of, and scrap recyclers are working harder than ever to collect, process and ship material.

While markets have softened a bit for copper, some exporters note that much of the decline was related to the brief lull that typically accompanies Chinese New Yeah However, now Chinese buying is back in the market, which should keep prices up at fairly high levels.

However, many of these handlers also are quick to add that no one really knows where the market is going. They say it is best if recyclers cover themselves by keeping material moving to avoid getting caught when the market does turn.

While the short term expectations are that most nonferrous metals should still move at a decent clip, looking further out, some market observers see a potential sharp correction by the end of this year or early next year.

(Additional news about nonferrous scrap, including breaking news and consuming industry reports, is available at www.RecyclingToday.com.)