NEW YORK, June 4 (Reuters) - Some U.S. copper fabricators have resorted to buying primary metal rather than scrap due to a tightness in supply, helping to support cathode premiums and providing a much-needed bright spot in an otherwise lackluster spot market, traders said on Monday.
Traders have seen some mills, which use scrap as raw material because it is usually cheaper, switching to readily-available cathode for their shorter term needs after a steady rise in scrap prices.
"I've had some guys tell me that they had to buy some cathode on the spot market. If you're in the scrap business right now, there's lots of demand and the spreads are tightening, but you really can't get the material," a cathode trader said.
Traders attribute the shortage of scrap to the continued depressed rates of demolition and construction activity as the U.S. housing market shows no signs of a significant recovery.
The precipitous plunge in COMEX prices to lows dating back to October may have also exacerbated that tightness as scrap yard hold onto stock in the hope that prices will recover.
After sinking to an intraday low at $3.2380 per lb on Monday, the COMEX July contract has shed roughly 19 percent of its value since touching a February peak at $4.
Still, premiums paid for physical cathode delivery have stabilized in a 4.5 to 6-cent per lb range above the benchmark London Metal Exchange cash price.
LME cash copper closed Friday at $7,373 a tonne, its cheapest price since Dec. 19.
While most market sources agreed with the range in cathode premiums, one seller cited a slight uptick in business from the Midwest, with premiums going as high as 6.5 cents.
"There's been a little bit of Midwest business done at the 6.5-cent level ... a couple of thousand tonnes for June delivery," the seller said.
"I think the scrap tightness necessitated a little of this business."
It is relatively easy for mills that make products for plumbing and electrical wiring to change their feed, but they prefer to use high-grade scrap instead of primary because it is cheaper.
Scrap is bought at a discount to COMEX and London Metal Exchange prices, while consumers have to pay a premium over benchmark prices to take delivery of cathode.
The secondary tightness has also caused that discount to disappear.
Bare bright copper wire, a high-grade scrap which contains few impurities, is equal to or even at a 1 to 2-cent premium to COMEX July, dependent on where it is being shipped, dealers said. This is in from about a 5-cent discount in March.
"There's still some decent demand on cathode, but I think it's from the scrap not being out there," one physical metals trader said.
It is highly unusual for scrap prices to trade at a premium - the last time was in the spring of 2009 when the market first felt the impact of plunging scrap generation rates as the global economic crisis hit the U.S. housing and construction sector.
The current dynamic is similar to 2009 - while domestic demand for scrap back then was not particularly high, scrap prices soared because supplies sank and China's appetite for all forms of the metal soared, forcing fabricators to turn to more-plentiful cathode.
This time around, the uptick in demand has not been as dramatic without an aggressive Chinese market presence and an overall fragile state of the copper market.
It does not after all reflect stronger underlying demand, they note. Some also suggested the purchases could be for industry participants short on annual contracted material.
"At the end of the day, I don't think this is spot business as much as it is just short-covering for annual contracts," a second trader said.
"I am not hearing much on a spot market basis. It's just traders and merchants who are short and forced to go the cheap route and get units out of the exchange."
The seller said the Midwest business could have also been some trader positioning for the planned maintenance shutdown of Rio Tinto's Kennecott Utah Copper's Garfield smelter last month.
"They'll get back up some time late in June and begin shipping something in late June, early July," the seller said.
Kennecott is the second-largest copper producer in the United States, accounting for nearly 25 percent of U.S. copper production.