Johnson: For those hoarding copper, this is why we hedge

Indeed, this collapse in price would have been hard to foresee given the bullish optimism of all-time highs and the structural production shortages predicted to soon face the globe.

So, what has happened?

The simple answer is that China is not performing as expected, and the rest of the global demand picture is not yet what the bulls had hoped for. There is also no question that the momentum has now reversed so sharply that now speculative longs are being forced out of the market. There is no clear way of knowing where the bottom is now, as the optimistic forecasts seem to be revised lower with each disappointing piece of new data from China.

Eventually, the bottom will come, but no one can say for sure when. As of July 25, copper prices have traded lower in nine consecutive daily sessions. Aluminum has arguably seen it just as bad, trading down in 13 of the last 14 trading days. The first up day was July 23, so the rout has really been extensive and has not been limited to copper. Indeed, essentially all nonferrous and ferrous metals alike have been on the slide this summer!

Given that reality of price volatility, it was surprising to hear so often from several of my clients that they see only a handful of their peers are actively engaging directly in the financial markets (whether it be Comex or the London Metal Exchange) to hedge their price risk. The ability to fix forward prices for clients without taking on additional risk, and the ability to add metal into inventory without the associated price risk is an increasingly attractive alternative to the rollercoaster outlined above — but several barriers to entry remain.

Not all companies may be large enough to trade financial instruments, and some clients may simply prefer to take the price risk rather than mitigate it.

It is our view, however, that whatever happens to the physical copper scrap markets in the near future — be it a scarcity caused by electrification of passenger vehicle fleets, the expansion of battery storage for power grids, or more concerning, a significant economic contraction — we see the copper scrap industry becoming increasing less interested in trying to forecast these impossible developments trajectory and more interested in dealing with the inevitable price risk and volatility that will ensue regardless.

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