Tight scrap market becomes swing factor for copper, nickel

Less scrap metal due to faltering industrial production last year will contribute to a declining surplus in the refined copper market in 2010, while stainless steel mills are likely to use more refined nickel and ferronickel in place of scrap, the Bank of America Merrill Lynch notes in a research report to clients.

In the first six months of 2009 manufacturers in China have been forced to substitute scrap with refined copper, the Aug. 21 research note states. According to Chinese copper statistics, refined copper has replaced around 120,000 tonnes of copper scrap and “is one reason behind the rise of China’s refined copper imports.”

While the global economy and copper prices have started to recover and car scrappage schemes may boost scrap supply, the research analysts forecast that the scrap ratio will not “reach the highs seen in previous years” and will contribute to a declining surplus on the refined copper market.

In terms of nickel, stainless steel scrap constitutes nearly half of the nickel units used by stainless steel mills, the report calculates. A 1% change in the stainless steel scrap ratio “leads to a roughly 15,000 tonne change of refined nickel demand.”

The research analysts argue that a “substantial rebound in the scrap ratio is unlikely” and forecast that as stainless steel mills begin to increase production again, nickel prices will be supported.

“This is one factor behind our forecast that the nickel market will show a deficit next year, even though some nickel producers are now re-starting capacities,” the report states.