Avoid unnecessary downtime by properly maintaining your baler.

When you first look at the equipment that is used in a material recovery facility (MRF) or in another type of recycling, scrap metal or waste processing facility, you see loaders, forklifts, conveyors, screens and of course balers. Other than the fixed sorting and separating equipment in a recycling plant or MRF, most of the equipment can be rented or in some cases purchased new or used with little turnaround time. Even if you are in a labor jam, you can bring in temporary workers. However, it is difficult and not too common, if not impossible, to rent a baler.

Balers, if not maintained properly, can cause long, extensive periods of downtime, especially in the case of needing hard-to-find or not readily available parts, like cylinders, motors, pumps, valves or liner plates. Therefore, balers need to be properly operated and maintained for a plant to produce efficiently and consistently.  

Here are some basic dos and don’ts regarding baler operation and maintenance.

In the case of cylinders, you could wait weeks to have one manufactured or repaired, which does not include shipping time if there isn’t a shop in your city. Find out the expected life of major components, such as cylinders and electrical and hydraulic components, and use that information to help you decide which parts to stock or where they might be readily available locally. In addition, find other operators that might have the same machine and, if it can be accomplished, partner up on certain parts.

Remember to include in your spares inventory parts for the wire tier. Whether it be a combined tier on a single-ram extrusion baler or a tier made by a separate manufacturer and integrated into your two–ram baler, it is important to maintain a sufficient inventory of the most common wear parts and, again, those that have the longest lead time. Once more, if you are not sure what parts to have on hand, speak with your baler manufacturer, a representative of the manufacturer or directly with the wire tier manufacturer’s service and parts representative.

Preventive maintenance on your baler does more than keep your baler operating properly, it also helps to ensure safe operation. A typical preventive maintenance program should include daily, weekly and monthly inspections of various components. Each inspection, regardless of the schedule, should start with safety in mind.

In addition to safety and helping to avoid serious break downs, routine preventive maintenance will help to increase the life expectancy of your machine along with ensuring consistent production of bales at the expected weight and density.

Examples of items to inspect daily are:

Items to inspect weekly include:

Items to inspect monthly include:

It is important to ensure the baler’s hydraulic system is operating properly. Have the hydraulic fluid analyzed frequently. Follow your OEM’s specifications or those of the fluid producer. Most OEMs recommend maintaining an oil analysis program.

In addition, a baler’s hydraulic system operates under high pressure and extreme temperatures. These factors are exacerbated by the typical facility’s environment. Operators must be trained properly and should complete daily inspections or some type of inspection that assures his or her accountability. The operator should keep the baler clean and monitor bale weights to ensure correct density and weight.

The author is with Midwest Recycling Service and Sales (MRSS), Cartersville, Georgia, and can be contacted at robb@mrssinc.com.

Lewis Salvage owner Mike Lewis shares how continuing a committed relationship with an equipment supplier has benefited his family-owned company as well as its customers.

Customer loyalty can make or break a business. If clients are satisfied, and the products and services offered to them are sufficient for their needs, their valued experience with a company will keep them coming back.

With numerous brand options available for any product or service, maintaining long-term relationships with customers is crucial for companies.

Mike Lewis, owner of Warsaw, Indiana-based Lewis Salvage, knows all about customer loyalty. Not only has his recycling, container transportation and metals processing company gained new, committed customers over the years, the family-owned business also has stayed true to its baling equipment supplier.

That customer loyalty has helped the fifth generation scrap processor to grow, both in terms of tonnage processed today to how many balers the company uses in its daily operations.

Lewis shares how continuing a committed relationship with its baling equipment supplier Sierra International Machinery, Bakersfield, California, has benefited his family-owned company as well as its customers.  

If it’s not broke, don’t fix it, and that is exactly how Lewis has handled his relationship with Sierra in regard to the baling equipment he runs at his Warsaw yard.

“I don’t think anybody else really has come up with an alternative to the Sierra equipment,” Lewis says of his more than 25-year commitment to the equipment manufacturer. “Since 1989, Sierra has been all we’ve used as it’s just been the best thing for us.”

Lewis Salvage has owned nearly 20 different pieces of Sierra equipment since 1989, Lewis says. He currently owns seven Sierra grapples and several balers.

For baling ferrous materials, from industrial production clips to shredder feedstock, the scrap processor uses a Sierra 4200 baler. The company also bales a mixture of unprepared ferrous shredding material, which Lewis refers to as “my own secret concoction,” using the 4200 baler.

To bale nonferrous materials—the company collects materials ranging from aluminum cans to copper tubing— Lewis operates a Sierra two-ram REB-2 baler.

After purchasing a Sierra T750 SL shear/baler for a demolition job in Indianapolis, Lewis says he moved the shear/baler to the company’s Warsaw location to use on site.

While Lewis says he has used different shear/balers, capable of shearing from 380 tons to 500 tons, the T750 SL shear/baler is the largest machine of this type Lewis Salvage has owned to date.

He says the 750 will not replace the 4200 baler; rather, the two balers will work simultaneously to process in even more volume.

“Over the years, I’ve know what size is needed for what we do,” Lewis says, adding, “I’m moving this 750 back to Warsaw because I’m ready to go to the next size. I’m not ready to get rid of the 4200; it will be [used] in addition to the 750 to step up production.”

The addition of another baler correlates to the company’s growth, Lewis says.

Lewis Salvage processes more than 50,000 tons of ferrous materials and nearly 4,000 tons of nonferrous materials per year. That is an increase from the 30,000 tons of ferrous materials and 2,000 tons of nonferrous materials the company was processing a decade ago.

Most of Lewis’ bales head to steel mills and shredders, he says.

The company’s container accounts also have served as a large part of its business. Lewis Salvage processes tons of material accumulated from the more than 400 containers it has placed with customers throughout northern Indiana.  

Lewis says although the number of containers the company serves has not expanded over the years—they are still a large part of the business—Lewis Salvage has grown its number of retail customers.

“We don’t really have a whole lot more industrial accounts than we did 10 years ago, but we have much more retail people coming through the door,” Lewis says.

He adds, “We have much more volume coming out of that retail increase.”

Lewis Salvage sees more than 200 retail customers today compared with the 75 retail clients from a decade ago.

To accommodate such progress, the company has added more processing equipment and building space to its Warsaw headquarters over the years. In the past, Lewis Salvage acquired more land to expand, such as in 1997 when the company added 5 acres on which it constructed a facility to house offices and nonferrous processing activities. In 2004, the company acquired another 5 acres of land in Warsaw for additional nonferrous processing operations as well as container/truck parking.

Lewis says purchasing two nearby competitors—Meyer Levin & Sons in 2007 and Mike Gill Auto & Truck Parts on Jan. 1 of this year— also caused a spike in business.

To handle this growth, Lewis says the company hasn’t added to its trucking fleet; however the northern Indiana processor has relied more on trucking companies.

Lewis Salvage serves its commercial and industrial markets with a fleet of eight roll-off trucks and tractor trailers.

“All the extra volume out the door is serviced by common carriers,” Lewis states.  

Lewis says one of the company’s 33 workers uses one of two grapples to move materials into the company’s ferrous baler. Lewis Salvage relies on a Sierra Model PA grapple as well as a PR grapple to pick up heavy loads, Lewis says.

With five fingers each, the Model PA grapple can handle more tonnage than the Model PR, he points out.

Either way, it is the durability of Sierra’s equipment that Lewis says he likes.

“The availability of parts and service also helps,” Lewis adds.

He continues, “The easiness to weld on the baler is important because everybody has to weld under a baler, it’s just the price you pay to be in the baler business.”

Lewis notes the value in ferrous scrap baler operators taking additional steps to keep the wrong materials (such as nonmetallics or nonferrous metals) out of the baling equipment to achieve a quality final product.

Before Lewis Salvage can get to this point, incoming material first goes through radiation detection equipment, he says. This is followed by inspections conducted prior to and after unloading ferrous materials into the baler, including checking cameras at the scales. “We have a guy who looks at everything; he goes through the radiation detection first, then he looks at the cameras on the scale, then he checks the ferrous scrap to tell someone else where to put it, and then someone looks at the material when it’s placed,” Lewis explains.

If ever a problem arises with the company’s ferrous and nonferrous baling equipment, Lewis knows he can reach out to someone at Sierra because he has developed a personal, longstanding relationship with the manufacturer.

“The integrity of the Sierra team is a big one, along with the personal relationships that we have with the people at Sierra,” Lewis offers.

The author is associate editor of Recycling Today and can be contacted via email at mworkman@gie.net.

MRF operators see the benefits of installing the operational flexibility to use balers for either fiber or containers.

Recycling company ReCommunity, based in Charlotte, North Carolina, operates under the principle that stopping a baler for maintenance purposes should not have to derail operations.

It may be for that reason that many of the company’s 32 material recovery facilities (MRFs) incorporate baler redundancy, in which the facilities’ balers have the ability to reasonably handle any of the commodities to be baled, says Will Herzog, ReCommunity director of marketing.

That means, for example, that either of a facility’s two balers could be used to process fiber and containers. While one baler typically handles fiber and the other is slotted for containers, if the need arises—say for maintenance projects—each baler can serve as a backup for the other.

“The way the sorting system is laid out allows us to have both fiber and all of the containers able to be fed to one or the other baler,” Herzog explains.

This type of functionality makes sense these days, particularly for high-volume facilities, says Nathiel Egosi, president of RRT Design & Construction (RRT), Melville, New York. And MRF operators around the country explain that having at least some level of redundancy should be part of doing business.  

“Redundancy by definition means having two of something,” says Egosi. Toward that end, he agrees, “people are putting in more than one baler.”

He says the need for redundancy becomes particularly acute for high-volume facilities—those processing anywhere from 20 tons per hour and up. Facilities at the higher end of that range, he says, absolutely need redundancy. At a level between 200 and 300 tons per shift, Egosi says, “you couldn’t operate without it.”

Egosi says redundancy also makes particular sense for high-volume facilities with very little storage space on either the incoming or outgoing sides.

Another factor in ensuring redundancy is choosing balers that can handle all the work. On this point, Egosi advocates the notion of full redundancy, where both machine can stand in for the other.

“You have to buy each machine so that in the event one is down, the other machine can do all the work.”

If it sounds like overcapacity, Egosi acknowledges, that’s not coincidental.

“It has to be oversized to be truly full redundancy,” he says. In fact, Egosi adds, “When both machines are running, the MRF basically has double the capacity.”

Egosi says, however, that the two balers installed need not be the exact same model. In fact, he adds, most of the time, they’re not. He likens it to a family’s selection of automobiles: “If you’re going to buy two cars, would you buy the exact same car?”

Egosi explains that while each machine is typically selected for its strength in handling the commodity it will most often process, flexibility of operations should be another factor.

“If you want true redundancy, you have to buy one machine that can do the entire job even when the other machine is down,” he says. “You can’t take your workload, cut it in half and then say you have redundancy, because the machine won’t be able to do it unless you run a second shift.”

While that in itself may be a strategy for some, such a plan also requires the facility to have storage space for commodities awaiting baling, Egosi points out.

“Different people approach the problem of redundancy differently,” he says. If the plan is to bale materials on a second shift, “then you need to have storage space for the accumulated material.”  

As Egosi indicates, achieving baler redundancy can occur in a number of ways. As such, selecting the right strategy depends on a number of variables at the MRF level, such as when it was built or how much floor space is available. Different businesses will require different degrees of redundancy, sources say.

Along those lines, it’s not just the type of balers installed that allows a MRF to have redundancy. As industry examples indicate, the conveying arrangements within a facility also can make or break its balers’ redundancy.

In some ReCommunity facilities, for example, balers are installed on opposite sides of commodity sorting areas, Herzog explains. He refers specifically to a few of the company’s Arizona MRFs.

“We have the commodities being sorted into live floor bunkers, and the baler infeeds are on either end of the live floor bunkers,” he says.

Because the conveyors can be run in either direction, they are able to feed either baling system with any of the commodities.

“Essentially the floors of the bunkers that we sort commodities into are conveyor belts, so we can have the conveyor belts run to the right, and it will feed one baler, or to the left, where it will feed the other baler,” Herzog says.

While certain commodities are preferentially directed to a certain baler, in the event of a maintenance project on one of the balers, material can be fed to the baler on the opposite side.

And, as expressed by Egosi, in ReCommunity’s case, many times different baler models are part of the plan.

“Typically, it’s different balers targeting different streams,” Herzog says. That could mean using a two-ram baler to process bottles and cans and a single-ram baler for paper and cardboard. And while that’s not always the case, Herzog says, “that’s something we’ve seen.”

He refers to ReCommunity’s San Antonio plant, which has that arrangement. The plant still has full redundancy, he says, as its bunkers are connected via conveyors set up to feed either baler with the various recyclables produced, Herzog says. Even though the balers aren’t the same, he says, each could still keep up with the volume.

“The two-ram baler is not necessarily ideal for high-volume paper processing,” he acknowledges. “It doesn’t mean it can’t work,” Herzog adds.

An alternate conveying arrangement that allows for redundancy, Egosi says, is the use of a diverter gate on top of each baler. Incoming material can be diverted to another conveyor belt that takes the material to the backup baler. Egosi says this method is often employed within existing plants rather than in newly constructed facilities.

“The simple solution often is to put in a diverter and take material to one baler and then transfer it over to the other,” he explains.

A similar approach was taken by Rhode Island Resource Recovery (RIRR), Johnston, Rhode Island, in 2012 when the company converted its dual-stream recycling line to single-stream processing at a rate of 50 tons per hour, says Brian Dubis, operations supervisor.

The resulting retrofit included a new baler and conveyors for containers, plus a diverter gate for the container stream. This allowed RIRR the capability to use its fiber baler for containers should that ever be necessary. The facility now processes a volume of close to 130,000 tons per year, Dubis says, and about 60 percent of the stream is fiber.

All materials are baled by the plant’s two fully automatic prepress balers: a Bollegraaf HBC140 for fiber and the newer Bollegraaf HBC120 for plastics, ferrous and aluminum.

Dubis says the MRF’s setup offers some level of backup, should the HBC120 ever be out of service, but it’s not 100 percent redundancy.

“We can shift our containers through our fiber line, but we can’t shift our fiber through our container side,” he says.

To make the switch, all that’s required is engaging the bypass flap. The floor conveyor from the container line lifts at a fairly steep angle to allow for the crossover of containers, he explains.

The high-capacity HBC140 is suited to handle the volume of both fiber and containers well, Dubis says.

As an added option, he says each of the balers also has redundancy in terms of wire tying, because the balers feature cross-tying systems. “If we were to have a problem we can switch over to the other system,” Dubis says. “We don’t use it all that often, but it’s nice to have.”  

As the experience of RIRR indicates, partial redundancy is an option that makes sense in many cases.

Egosi says opting for partial redundancy may have to do with a facility’s existing design as well as the recycler’s perceptions about whether there’s a need for backup on all machines. It also tends to be a very common solution.

Dubis says he considered 100 percent redundancy, even to the point of calculating the costs and plan ideas, when the retrofit was planned in 2011.

“That would have required a couple of conveyor expansions, and the footprint of the additional equipment would have taken up too much space,” he explains. “We weighed the consideration against the amount of time and space it would have taken, and it wasn’t worth it.”

Another factor that was considered, Dubis says, was the 18 years of experience he’s had with the balers themselves. “The Bollegraaf balers, from my perspective, are bulletproof. We really don’t have any problems with them, so it wasn’t worth the time and effort to try to build in a workaround.”

He says downtime on the balers represents less than 10 percent of all the downtime that occurs at the facility.

Another facility with partial baler redundancy is Diversified Recycling, the recycling subsidiary of Homewood Disposal, based in East Hazel Crest, Illinois, just south of Chicago.

The company expanded its three-year-old system in 2013 to incorporate new technology and to better handle changing material streams and markets. The single-stream MRF serves roughly 75 Midwest communities and has a processing capacity of around 50 tons per hour.

Jon Shroeder, plant manager, says the small upgrade completed in 2013 affected parts of the four-year-old single-stream line but not the two existing balers.

Like RIRR, Diversified uses an HBC140 for fiber and an HBC120 for containers. The upgrade increased the capacity of the facility to 50 tons per hour; however, some of the commodity bunkers were reused.

Shroeder says the container baler could theoretically bale fiber if necessary, should the fiber baler ever go out of service. What allows this is the reversible conveyor serving the fiber bunker.

“The bunker conveyor can go either direction, either to one baler or to the other,” Shroeder says. He explains that the balers are located on opposite ends of the processing area, but the conveyor serving the cardboard and news bunkers can go to either baler’s infeed.

“It’s just running [the conveyor] in the opposite direction, and you open the other door and you can go to the container baler,” he says.

Meanwhile, Egosi points out that having baling redundancy built in to a particular plant doesn’t necessarily mean operations are business as usual. “When going into backup mode,” he says, “don’t expect to be running at the same capacity as normal.”

It’s an idea that once again relates to having spare capacity. “You can transfer material, but the material processing has got to keep up,” he says.

The author is a managing editor with the Recycling Today Media Group and can be reached at lmckenna@gie.net.

When it comes to maintaining a baler’s wire tying system, there are no shortcuts to ensuring optimal performance.

While it’s difficult to generalize when talking about baling equipment used in the document destruction industry in light of the variety of baler types and sizes used as well as the diversity of wire tying systems at work, according to Pat Casserly of Accent Wire, one thing remains true regardless: the need for preventive maintenance. “There are no shortcuts,” he says.

“The document destruction industry utilizes all types and sizes of balers and tying systems,” Casserly says. “Small operations rely on a vertical press and hand tying with bale ties, while the vast majority will utilize a small horizontal auto-tie machine tying with black annealed box wire.”

Tomball, Texas-based Accent Wire specializes in the largest document destruction operations that use two-ram balers with galvanized wire tying systems, he says. “Personally, I have approximately 23 years experience in the care and maintenance of this type of tying system.”

In the Q&A that follows, Casserly, who is based in New York, shares some of the insight he has attained over the years while working for Accent Wire as well as other suppliers to the industry.  

SDB: How can document destruction companies determine whether their current wire costs are reasonable for the size of their operations or if there is room to trim these costs?

Patrick Casserly (PC): I think they can do so by analyzing bale weights.

Using the gauge on an automatic wire tying system, like a black-annealed, single-ram wire tying system, you can actually quantify the number of twists that are in the knot. Up to a certain point, you can work that wire. More twists generally give you a stronger knot, up until a point where you then fracture the wire.

For a two-ram baler that uses an auto-tie system fed with galvanized wire, the operator can adjust the number of straps per bale. But, when you have a single-ram baler with an automatic tying system, you are limited to only five straps per bale. These balers basically have five separate tying systems on the machine.  

SDB: In terms of type or gauge of wire to use, what do document destruction operations need to consider?

PC: They have to really determine whether they bought the right baler. If you are using a two-ram baler, you are using a high-carbon, galvanized wire.

If you are using a two-ram baler, you are using a high-carbon, galvanized wire. If you are using a single-ram baler, you are using a black, low-carbon wire.

The material they are baling doesn’t have a ton of memory in it, so generally we go with 13- or 12-gauge wire [when using high-carbon galvanized wire in a two-ram baler].

On the black wire side, which is out of my realm, generally a 10 or 11 gauge wire.   

SDB: How might the amount of wire ties needed vary based on the size of the shredded material being baled?

PC: Again, in a single-ram, auto-tie baler, if you are doing a 2-inch shred or so, you are limited to the number of straps, and that is why the bales fall apart.

With a two-ram machine, you can put as many straps on as you’d like.

I think there is a direct correlation between the smaller the shred size and the number of straps you will need.  

SDB: What advice do you have for maintaining wire tying equipment to achieve the best ongoing performance?

PC: That is an easy one,too: preventive maintenance (PM). You cannot do it enough. You cannot clean the machine enough. Whether it be a single-ram or a two-ram machine, the more you clean it, the better off you are going to be, the fewer surprises you will tend to have because you will spot wear on the machine when it is still manageable. Whether you do monthly, weekly or quarterly PM, it avoids emergency service calls.

The thing with an emergency is, here I am in the Northeast, where I don’t have a huge amount of travel; but, I have two and three jobs a day. If you call me with an emergency, even though you are 150 miles away for the most part, I may tell you I will not be able to get there until Thursday of next week because of the number of service calls I have. While the cost of that service call is probably only going to be a few hours and a few hundred dollars in travel, you are looking at downtime.

Nobody does it though. The vast majority of people do not do PM.

Realistically, if you are doing 100 to 150 bales per day and you don’t have somebody who really knows that equipment inside and out and you are going to rely on an outside service provider, you need to do PM at least three to four times per year to prevent downtime. Even if you have that, when you do PM, if a switch is working or a valve is working, we don’t change them. And you can never tell when a switch or a valve is going to walk off that cliff.

But the vast majority of what we do are emergency service jobs and very few PM jobs. I would love to have PM jobs.  … I would travel so much less.  

SDB: What is the most common reason operations will encounter problems with their baling wire?

PC: We all sell our wire by the pound, and the less steel an operation puts on a bale, the more money in their pockets. Therefore, people will quite often undersize and hope for the best.

It is funny; when people call me for service, quite often what they use as their barometer is how much waste wire they are seeing on the floor. They can equate great dollars to how much wire they throw away.

Basically, it is the wrong size wire or not enough straps per bale.  

SDB: Do best practices apply when it comes to storing wire to ensure it performs as it should when installed into the wire tier?

PC: Wire storage is greatly, greatly emphasized with me. Bale ties, of course, we push around the bale by hand. In an auto-tie system, the wire gets pulled by the baler, so it is not as if we have to feed it.

Oxidation does become an issue in that it causes abrasion and increases wear. The care and consideration for where and how wire is stored is important, but not nearly as important as with a galvanized system, where we actually push the wire around the track. If the wire is old, if the wax coat has evaporated off and it now has a rough, abrasive surface, that is going to wear the bejesus out of the parts in the track of the machine.

In terms of storing wire, it wants to be kept in the cleanest, driest possible conditions that it can be kept in. Keeping it off of the floor on a skid or something that allows air to circulate allows condensation from a cold night and a warmer, moist morning to evaporate, and we can get the wire to dry up more quickly.  

SDB: What can destruction operations do if they suspect they purchased faulty baling wire? How common is it for operations to encounter issues with their baling wire for this reason?

PC: What I do specifically when I am training at a new plant or training new people is show them how to load the wire. The first thing we do is take the tag off and hang it on this hook. That way, if there is a problem, you have the tag that is from that coil, because important production information is on that tag that your vendor certainly will want to know. You want to call that supplier immediately. If you do have a problem, switch to another bundle or box and see if the problem is isolated or carries through.

But, it is uncommon if you look at the percentage of wire sold for it to have problems. It is a very small percentage, but it does happen. You try to find the reason for the problem. Is it a mechanical marring of that wire that is causing the problem. Is it isolated to one tie or, on the single-ram baler, to one band? Is that the one that is always breaking? That generally tells you that it is more of a machine problem.

On a two ram, if the wire is breaking, is it breaking at the knot? If it is breaking at a certain point in the knot, it indicates that there is a problem with the part that forms the knot.

I think the big thing is to contact your vendor as quickly as possible and let him know. Even go so far that if you see wire come in and it looks damaged, take a picture of it and contact your vendor because I think it is a lot easier to be proactive. If you have a picture, and the vendor knows it was delivered around that time, that is hard to say no.  

SDB: What kinds of automated devices or features can help control wire usage or prevent destruction operations from wasting wire?

PC: That would be a Mark 1, Mod 1 Human Being who has an interest in things and a head on his shoulders. I don’t get complaints of a problem until a manager walks out and sees wire wasted on the floor.

A human walking around is the only thing that can save you money on wire. There is no automated device. If you invent that, you can quit your day job.

SDB: What are some important tips for employees who operate balers to remember in terms of preventing the use of excess wire?

PC: Again, it is that human on the floor monitoring, looking at the bales, looking at the straps.

As a wire tier technician, if that’s what you’d call me, the knot tells you the story of what is going on. It tells you whether the wire is good or bad, etc.

Quite often, people will run a baler in manual mode to really pack it to get the weights in. … Quite often, just letting it run in automatic, doing what it is supposed to do, you will find yourself using less wire. 

The harder people work the machine, the harder they are working their pumps. And, let’s face it, if you are exporting material, you can only put so much into a container, and whether you can do it in two, or three or four less bales, great; you are cycling the baler that many fewer times and there is that much less wire used. However, you are stressing that system to the point where I guarantee you your costs will be tenfold more expensive due to what you are doing to the pumps. The harder you work the hydraulic system, the more heat you create. 

So you might as well just let it run. If you can load a container in 46 bales and let the system run as it was designed and have no problems, doing it in 40 is not better.

Patrick Casserly is a service technician for Accent Wire, Tomball, Texas. He can be contacted at 908-296-0720. A version of this article originally ran in the November/December issue of Storage & Destruction Business magazine, a sister publication to Recycling Today. 

Real demand for copper is characterized as uncertain, and pricing may continue to trend downward.

Copper prices were quite volatile in 2014. The move toward a supply surplus raised expectations for lower prices; as a whole, the market has trended lower.

To Dec. 19, 2014, prices averaged $6,875 per metric ton, down from $7,330 for the same period in 2013. But this masks some sharp price moves in the first half of the year—first to the downside and then to the upside.  

The first sell-off was triggered by a Chinese corporate bond default, which raised concerns that the shadow banking system in China might be in trouble. With copper having been widely used as collateral in the shadow banking system, there were fears that metal held as collateral could find its way back into the market if lenders decided to liquidate.

This led copper prices to fall to $6,321 per metric ton from roughly $7,400 at the start of the year, but prices were rallying again by late March—the earlier sell-off had been a knee-jerk reaction.

The rebound picked up pace when it became apparent that the projected supply surplus was not materializing in light of a number of supply disruptions, the most notable of which was the lack of concentrate exports from Indonesia after producers balked at paying the export taxes that the country’s government had imposed at the start of the year.

In addition, other ramp-up issues, including those at the 450,000-metric-ton-per-year Oyu Tolgoi mine in Mongolia, meant the supply surplus in 2014 was not as high as expected.

The copper market has a history of not meeting production targets, and 2014 was no exception. Surpluses are expected in 2015 and 2016; the degree to which these materialize remains to be determined.  

While supply has not be as plentiful, actual demand also is likely to have grown at a slower rate than earlier forecasts predicted because China, Europe and many emerging countries have suffered from economic slowdowns.

However, considerable uncertainty exists as to the state of real demand for copper. Top-down observations (taking into account economic data) would suggest weakness, while official figures from the International Copper Study Group (ICSG), Lisbon, Portugal, indicate healthy growth in demand.

In the first eight months of 2014, global usage is forecast to have risen 12 percent compared with the same period in 2013. Demand for refined copper was boosted by an apparent shortage in high-grade copper scrap, which means more copper cathode was used by semifabricators.

Chinese demand rose a reported 21 percent in the first eight months of 2015 based on a 27 percent increase in net imports of refined copper. Given the economic slowdown in China and the earlier practice of importing copper as a means to get credit there, it seems highly unlikely that Chinese usage has been anywhere near as strong as the ICSG data show, with its figure swollen by a degree of stock-building.

The ICSG data put the market in a supply deficit of some 509,000 metric tons for January to August; had that been the case, copper prices would not be trading near four-year lows.  

The outlook for copper remains slightly bearish because the supply surplus is expected to grow in 2015 and 2016. Even though supply disruptions are likely, we still expect oversupply of approximately 200,000 metric tons in 2015 and roughly 500,000 metric tons in 2016.

These forecasts are not without risk. While lower energy prices and weaker commodity currencies are likely to prompt producers to maximize their efforts to boost output and weaker economic growth could weaken demand further, weaker oil prices and the potential for stimulus in China and Europe could improve the prospects for demand.

On the basis of the big-picture outlook for copper, we would expect prices to remain under pressure. While they are still above the marginal cost of production, prices possibly could fall further. We would not, however, look for them to follow in the footsteps of oil or iron ore, which have suffered heavily from planned increases in supply as producers have attempted to increase market share.

Copper stocks do not seem too high—at least at the exchange level. LME (London Metal Exchange) stocks are low at 170,000 metric tons, down from a 2014 high of 359,075 metric tons and a peak of 678,225 metric tons in June 2013; Shanghai Futures Exchange stocks stand at 92,829 metric tons, down from 125,850 metric tons at the end of 2013; and COMEX stocks stand at 26,915 metric tons. Collectively, exchange stocks account for around 1.3 percent of annual consumption.

Since the nearby time spreads on the LME have been in a backwardation for most of the second half of 2014, there is probably not too much metal stored outside the LME system in the West. But the situation is different in China. In addition to exchange stocks, stocks in bonded warehouses in Shanghai are thought to number nearly 600,000 metric tons, which lifts the volume of above-ground metal, which in turn should provide something of a cushion against either a pickup in consumption or in supply disruptions.

In addition to these stocks, China’s State Reserve Bureau (SRB) has been building up its copper reserves—it is thought to have bought some 500,000 metric tons in 2014. This metal once again will enable the Chinese to feed metal out into the market should shortages threaten its industrial capability or if prices rise too far.

In short, there are considerable quantities of copper around to prevent any shortage and, with surpluses expected this year and in 2016, the risk to prices is mostly to the downside.

China is a net buyer of copper each year but, while it might be thought that weaker prices would be in its interest, the country is also a large producer of the metal. Beijing is keen that prices do not fall to levels that prompt production cuts, which would affect revenue and jobs.

In the past, China’s SRB has purchased metal to support the price of copper and its domestic copper industry. Because the SRB already was more active than usual in its purchasing in 2014, there is a risk that it may not have the capacity to provide extra support to the industry in 2015 should prices continue to fall.

Still, given the country’s foreign exchange reserves and its structural copper supply deficit, it may take the long-term view to accumulate even more copper should prices continue to weaken.  

With marginal costs of production thought to lie around $5,500 to $5,800, there is at present little pressure on producers to cut output. In addition, lower oil prices will have reduced marginal production costs, so it is conceivable that the overall weak climate for copper could result in a further decline in prices.

The funds on COMEX are already net short 32,958 contracts of copper, with some 80,129 contracts of gross shorts, which is near the record level of 84,928 contracts. The previous peak was 78,588 contracts, suggesting that shorts are increasingly comfortable with holding a bigger short position.

While this could mean further downside pressure on copper prices as a result of fund shorting, the large short position also means, conversely, that the market is susceptible to short covering.

On balance, we feel the weaker economic climate will continue to weigh on copper prices in the first quarter of 2015, but the likelihood of further stimulus in Europe and China may well trigger short-covering rallies en route.

We, therefore, feel copper prices are likely to continue to oscillate sideways to lower, with dips prompting nearby pricing and short covering while rallies attract nearby hedge selling. With a supply surplus on the market for the next two years, a significant turnaround in the global economic outlook would be needed before the market gets outright bullish again for copper.

Such a scenario is most likely to play out in China, but stricter governance there and a commitment to rid the economy of overcapacity may well mean the global economy must acclimatize to slower growth in China and emerging markets for a while.

Still, China’s economy is massive, so even growth of 6.5 to 7 percent means a great deal more metal is consumed each year, so there is probably little room to get too bearish.

The author is head of research for U.K.-based FastMarkets, www.fastmarkets.com, a provider of delayed free and live subscription-based metal market news, data and research. He can be contacted at william.adams@fastmarkets.com.