The Traders' Dilemma

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Non-ferrous Metals

Classic trader wisdom says cut your losses and run your profits, not too hard a dictum to follow when moderate volatility is buffeting the market but what should scrap dealers (and indeed any metals distributors) do in today’s market?

Metal prices have collapsed over the last few weeks. Copper has dropped from $2.85 lb to under $1.80 lb, aluminum from nearly $1.10 lb to 0.81 lb, nickel from $7.25 lb to $4.13 lb and so on. Stories abound of dealers sitting on hundreds of thousands of pounds of inventory that has dropped $1 lb in just the last week. Scrap traders that had been blamed for accentuating the metal shortages of a year ago by selling to China are now faced with inventory that is not only falling in value by the day but for which they often can’t even find buyers at any price. Steve Maddox of Midland Industrial Metals in the UK tells MetalMiner he was buying aluminum scrap 10 days ago at £900 ton, today the market is £450 ” if you can get anyone to make you an offer. MIM are laying off staff as business has completely dried up. But the situation is even worse for those dealers engaged in export to China. The business model has always required that buyers place between 10-20% of the contract value as a cash deposit prior to shipment with the balance payable on arrival. But with the metals prices dropping 10% in a week, Chinese buyers are walking away from contracts  as  cargoes are on the water and forfeiting their deposits. 10% doesn’t give much comfort to sellers when the cargo is worth 30% less on arrival than it was on shipment ” and you can’t find anyone to buy it even at the discounted price.

Scrap dealers everywhere are sitting on massive losses and like non ferrous distributors in the prime market they are trying to decide should they move the stock at the current market price or sit on it and hope prices will come back up in the near future. The same issue will soon be faced by steel distributors. So far prices have not come off dramatically but they have started to fall. Next year, prices will slide as sales drop off and imports flood in. With the US$/Euro exchange rate at 1.25 the US market is suddenly attractive again to European and Asian producers who have largely been excluded for the last two years by the weak dollar. Buyers will live hand to mouth while they wait for prices to come off, and come off they will regardless of what the producers may say about cutting production and restricting supply.

But back to those traders, cut and run or sit it out ” depends on how deep your pockets are, how good your credit is and how long you think the market will take to turn. After two years of fabulous profits the coffers may be able to weather the storm in the short term but with credit tight and in our opinion little likelihood of a bounce back to the prices last seen in July/August we would be inclined to take the pain and re-stock with lower priced material. We don’t see a profit to be had from 2nd/3rd quarter purchases anytime before the second half of 2009.

–Stuart Burns

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