Has the copper price rally which started so spectacularly late last year run out of momentum?
The London Metal Exchange (LME) price, basis three-month delivery, hit a nine-month high of $6,204 per tonne last month, since when it has churned in a broadly directionless range below the $6,000 level.
This is all the more surprising given the severity of the supply-side hits that have been grabbing the headlines.
The strike at the world's largest mine, Escondida in Chile, has ended. But at 43 days it was longer than expected and, factoring in a gradual ramp-up to full production, is going to translate into some 230,000-240,000 tonnes of lost output, analysts reckon.
The world's second largest mine, Grasberg in Indonesia, is operating at only 40 percent of capacity due to an increasingly acrimonious dispute between operator Freeport McMoRan and the Indonesian government.
Cerro Verde, another huge copper mine in Peru also operated by Freeport, is also seeing protracted strike action, albeit with uncertain impact on output levels.
And yet the copper price seems uninterested.
This is, simply put, because there is a lot of the stuff around.Global exchange stocks of copper have surged by around 167,000 tonnes so far this month to 750,000 tonnes, the highest level since mid-2013.
Physical premiums everywhere are bombed out at extremely low levels.
It all seems confusingly counter-intuitive until you factor in a hidden supply surge in the form of scrap metal.
OUT OF THE SHADOWS
Scrap plays an important role in all industrial metal markets but it is a notoriously opaque part of the supply chain.
Although it ends up being refined into new metal by big operators such as Germany's Aurubis, its collection and storage is handled by a host of much smaller entities, many of them still family-operated even in the developed world.
That means there is much statistical darkness as to what is actually happening in this part of the market.
But the surest signal is price.
Scrap copper is priced as a discount to the primary copper price, whether that be the one traded on the LME or the CME in the U.S.
And those discounts flexed sharply wider when the copper price rallied over the course of October and November last year.
According to assessments by S&P Global Platts, No.1 bare bright, the highest-purity form of copper scrap, traded at flat to the CME price in the second quarter of last year but flexed out to a discount of nine cents per lb ($198 per tonne) in November.
The discount for No.2 scrap, typically containing 94-96 percent copper, followed the same pattern, widening from 20-21 cents per lb in the middle of 2016 to 40 cents at the start of 2017.
The price patterns imply a surge in supply, triggered by the improvement in outright pricing.
Further evidence comes from China, the world's largest buyer of copper scrap, just as it is the world's largest buyer of mine concentrates and refined metal.
Scrap import volumes rose by 24 percent to 549,000 tonnes (bulk weight, not contained copper) in January-February, a noteworthy break of a long-running trend of falling imports.
And Aurubis itself, which is one of Europe's biggest copper scrap processors, told analysts on its Q4 2016 conference call that it is filled up with scrap until the end of the second quarter of this year.
HOW SCRAP BALANCES THE MARKET
Everything points to a wall of copper scrap hitting the market over the last few months.
And this is typical of how scrap supply behaves.
The small and fractured nature of the scrap supply chain mitigates against sophisticated price hedging.
Rather, when the price falls, scrap dealers simply stop selling, releasing accumulated stocks only when the price recovers and they can sell at a profit again.
This collective behaviour means scrap supply dwindles in a falling price environment and surges in a higher one, effectively acting as a balancing mechanism on rapid price moves in either direction.
It also directly impacts both copper production and consumption.
With better availability, copper refiners such as Aurubis can lift the amount of refined metal they produce from scrap.
But many fabricators, such as brass and rod mills, also have the ability to feed scrap directly into their product mix, displacing some of their requirement for refined copper cathode.
They will only do so if the price is right. And with those wide discounts still holding in the United States, the price is currently right.
Unlike the wall of mine supply that washed over the copper market last year, this wall of scrap is much harder to track and quantify.
But one analyst, David Wilson at Citi, suggests that scrap supply feeding into both the production and consumption sides of the copper market balance ledger may increase by as much as a million tonnes this year relative to last.
That eclipses Citi's calculation of 375,000 tonnes of mine copper supply lost to disruption so far this year.
And even though Citi and other analysts are collectively raising their "disruption allowance" calculations for global copper mine supply this year, the impact would still be largely mitigated by scrap if Wilson's estimate is anywhere near correct.
But there is a sting in this scrap tale.
The current wave of scrap permeating the copper supply chain is by its very nature a one-off phenomenon.
Once stocks of material accumulated during the weak price environment of 2015-2016 are released, that will be it.
Until the effects are fully played out, however, scrap is going to remain an important market balancing mechanism, smoothing the anticipated transition from supply surplus to supply deficit in the copper market.http://www.reuters.com/article/copper-supply-idUSL5N1H62G6