Has the fall in copper price affected the dynamics of direct melt smelting?

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1 Has the fall in copper price affected the dynamics of direct melt smelting? Metal Bulletin Copper Recycling Conference June 15/ Munich MARCO CALAMIA Marco KME Calamia Group Head of Metal, KME Group, Italy

2 Has the fall in copper price affected the dynamics of direct melt smelting? How have narrow spreads between primary grades and scrap affected alloy fabricators purchasing strategies? Are certain alloy specifications more susceptible to the abandoning of scrap in feedstocks? To what extent are scrap purchasers affected by alloy component prices? Marco KME Calamia Group Head of Metal, KME Group, Italy 1

3 Content Who is KME? Cathodes vs Scrap KME approach The following presentation is based on KME scrap activities and utilization, based on fabricators operations, that is different from others, like secondary refineries Marco KME Calamia Group Head of Metal, KME Group, Italy 2

4 Who is KME Marco KME Calamia Group Head of Metal, KME Group, Italy 3

5 KME EUROPEAN LEADER AND INNOVATOR IN COPPER PRODUCTS Founded in 1886 and listed on the Milan Stock Exchange since 1897 A major European Group and the world largest fabricator of copper and copper alloy semi-finished products plus a wide range of high technological special products On average, KME posted a yearly turnover of 2,5 billion and produced approx between ktons of copper and copper alloy products Worldwide and European market leader of copper and copper alloy semi-finished products 12 plants in Europe and 1 in China ~10,000 shareholders ~20,000 commercial partners ~6,000 employees Headquarters in Florence KME Group

6 A world unique portfolio of products Division Product Main end uses Rolled Products Building, drainage, architecture, decoration, electrical engineering, connectors, boilers, coinage, solar collectors, snap fasteners, Tube Products Air conditioning & refrigeration, fittings, sanitary installations (water, heating, gas), boilers, electrical uses, thermal solar, medical industry Brass & Copper Rods Taps, valves and fittings, precision mechanical parts, automotive and transportation, electronic and electrical appliances, lock industry, building and architecture Special Shipbuilding, offshore, chemical Industry, machine building, house energy, steel industry Marco KME Calamia Group Head of Metal, KME Group, Italy 5

7 How have narrow spreads between primary grades and scrap affected alloy fabricators purchasing strategies? Cathodes vs Scrap Marco KME Calamia Group Head of Metal, KME Group, Italy 6

8 Two main external sources, with total different characteristics and dynamics Mine/ new metal Worldwide market Transparent pricing (based on LME) Strong reference price (official premium) Few big Suppliers Mines located far from Europe Scrap recycling Local/regional market Not full transparent pricing Wide price oscillation (discounts ) Many small fragmented Suppliers Activities mainly located in Europe Marco KME Calamia Group Head of Metal, KME Group, Italy 7

9 Scrap vs primary material Main advantage for using scrap vs primary material Terms of payment, delay vs cash upon release of material Discount on LME vs premium on LME Increase of margin Main disadvantage of using scrap: Higher volatility in pricing and availability Handling Some higher risk profile Higher admin issue (environment compliance, heavy admin work ) Marco KME Calamia Group Head of Metal, KME Group, Italy 8

10 Scrap vs primary material Cost differences between the 2 sources Premium vs discount Financial valuation (terms of payment) CIF incoterm vs delivered Internal costs (Bricketing, sorting, Handling) Metal yield Risk profile (delivering, hedging ecc) These are the basis of the trade off analysis Marco KME Calamia Group Head of Metal, KME Group, Italy 9

11 Interconnession between the 2 markets In some production scrap and primary are alternatives, so the dynamic of one market could influence the other Low availability of scrap Less availability in cathodes (i.e queue in wh) increase of premium discount reduction But sometimes the market does not follow these theoretical rules, and this matter can create particular situation Marco KME Calamia Group Head of Metal, KME Group, Italy 10

12 Scrap market ; high volatility market Environmental issues increased a lot in the last years, pushing the concept of recycle and the burden of rules of clean scrap recovery and process Due to the high metal value, specially copper, there is a natural scrap recovery and collection of a large portion of old scrap and new scrap Market changed: in the past, collection and consumption were in Europe while nowadays, the largest consumption area is in China. In fact, until the beginning of the century, EU was a net importer of scrap and now stands as a net exporter. Structural changed of the market ; increase of operations in tolling reduced the availability of high grade scrap, mainly in the wire rods business Marco KME Calamia Group Head of Metal, KME Group, Italy 11

13 Scrap market ; high volatility market The main factors that influence the scrap market situation are: Dynamic of copper price Volatility & elasticity in addition to the previous point Increasing copper price = market more liquid. Decreasing copper price = market less liquid. This is mainly due because of the speculative behavior of the scrap traders. Copper price High copper price makes the market more favorable Industrial production Chinese pressure Some qualities of scrap comes form the industrial production (cable, wire, ecc); so the availability is strictly linked to their activity Since some years, the activity of the Chinese buyers could have a strong influence on the scrap availability in some European sourcing market, more independent by the local consumers (i.e. UK). In this sense an important factor is the arbitrage LME/ FHTSE: when positive, pressure is higher. Marco KME Calamia Group Head of Metal, KME Group, Italy 12

14 Scrap issues Availability Reduction of industrial activity ) has reduced the scrap generation (Hg scrap); Reduction of building renovation/ Demolition reduce availability of medium high grade Reduction of Public investment (infrastructure, railways ecc) has had indirect impact on availability Crisis and miniaturization has reduced scrap generation form the End of life products Some market reduced or lost ; UK, ME to China and far east, Eat Europe for internal consumption Change in the market, cable producers use more scrap and mainly his recycle in conversion, excluding this material from the scrap market Higher aggressiveness of the smelters, invading scrap area not used in the past (HG scrap) Discount Lower copper price reduces the discount Less volatility reduce the discount because reduce the chance of speculation of the scrap traders Margin reduced narrows the discount Marco KME Calamia Group Head of Metal, KME Group, Italy 13 13

15 Cathodes market Cathodes market is more stable, in terms of premium and availability, but some aspects has being influencing the dynamic Less pressure (demand reduction) ; compared to the past, the world copper is long, so not pressure on the premium The problem of the Queue that heavily impacted the cathodes market in 2013 has been practically solved, Specific matters (duty in Russia) have increased cathodes availability (mainly in europe) Producers financial weaker, so they offer different solution and allow traders to strengthen their position Entrance of traders, offering financial support to the market (to producers and to consumers ) Increase of terms of payments (entrance of the traders ) Reduces distance from the scrap (less consumption but less availability of scrap) Marco KME Calamia Group Head of Metal, KME Group, Italy 14

16 Outcome of the situation In this situation, some advantages of scrap usage are less relevant Financial constraint; increase of presence of traders in the cathodes have increased the liquidity of the market, offering similar terms of payment Lower discount in the scrap market Good and constant availability of cathodes vs scrap Marco KME Calamia Group Head of Metal, KME Group, Italy 15 15

17 Trend of the main material category The consequence is clearly evidenced in the following graphics cat A standard mill/1s gran 98, Figures in Discount on copper content Distance among categories has been significantly narrowed reduced in the last years, reducing the margin Marco KME Calamia Group Head of Metal, KME Group, Italy 16

18 KME approach Not all the business have the same approach analysis, so it should be pointed out which business and for which alloys we can have trade off Semis; there is a clear alternative among high grade scrap vs standard cathodes, but with some limitation in using scrap in some products for physical, chemical and technical limitation. The comparative analysis is relevant in this area. Brass rod; there is no alternative between cathodes and scrap,because cathodes are not use not used, just copper and brass scrap in addition to turning for the tolling business, in general more than 50%. The analysis is made for zinc, in which the alternatives is relevant and specifically based on the scrap zinc market Marco KME Calamia Group Head of Metal, KME Group, Italy 17

19 Thank you for attention Marco KME Calamia Group Head of Metal, KME Group, Italy 18