Though the market paused recently for an inventory correction, mill and service center executives expect red metals to resume
a modest growth rate for 2005.

By Myra Pinkham,
Contributing Editor

While North American demand for copper and brass took a little breather in recent months, most industry observers—mills and service centers alike—are at least cautiously optimistic that 2005 will be another good year for red metals.

“Demand has been pretty strong—not a gangbuster like in 1999 and 2000, but quite an improvement over 2003,” says Keith Kessler, red metals and aluminum marketing manager for Integris Metals, Minneapolis. He predicts continued growth in 2005, though perhaps at a more moderate rate than the double-digit increases of last year.

William Sabol, president of Copper and Brass Sales, Detroit, agrees that 2005 should be another “good, solid year” despite some softening of business starting in the fourth quarter. “Until the last 90 days, it had been very strong. Now it is just okay,” he says, blaming an inventory correction for the recent slowdown. “Everyone is cautiously optimistic about the year as a whole.”

Arthur Miele, senior vice president of marketing and sales for Phelps Dodge Corp., Phoenix, states that worldwide copper fundamentals proved to be very positive throughout 2004, reflecting continued double-digit consumption growth in China, strong growth in Asia overall, and above-normal growth rates in the United States.

Copper consumption in the United States grew by an estimated 9 percent last year, he says, pushed by the residential construction sector where housing starts rose nearly 5 percent and capital goods orders grew an even stronger 10 percent.

Even with what they term “a more serious than anticipated downturn in service center shipments during December,” the Copper and Brass Servicenter Association, Wayne, Pa., says 2004 service center shipments of red metals increased 10.3 percent from 2003, with copper shipments up 11.4 percent and alloy shipments up 9.7 percent.

Donald M. Commerford Jr., senior vice president of Revere Copper Products Inc., Rome, N.Y., places the increase for last year even higher, at about 11 percent, due largely to three end-use markets: ordnance bound for Iraq, coinage and architectural applications.

Kessler attributes much of the growth to pent-up demand, notably in the architectural and electrical distribution markets. “In both cases, business had been slow for the past few years. Customers hadn’t been ready to sign on the dotted line and move ahead with projects.”

Another factor pushing architectural demand, Commerford says, is the low interest rates—which are expected to rise gradually in 2005 and could weaken copper demand.

Richard Farmer, co-president of Farmers Copper Ltd., Galveston, Texas, was surprised at the strength of architectural demand in the past year, given the high and volatile copper price. Comex copper prices increased over 30 percent in 2004 going from $110 to $145 a pound.

Cerro Flow Products Inc., Sauget, Ill., saw the effects of strong housing starts in 2004 (up 5.7 percent according to National Association of Home Builders figures), as well as a resurgence of commercial construction, says Gary Ewing, Cerro president.

Though the high price of copper has prompted some increase in material substitution, especially in plumbing applications where copper competes with plastic, Ewing predicts that demand from the industrial OEM sector should remain strong in 2005. Plumbing, meanwhile, will continue to ride the peaks and valleys of the red metal’s price. “It will be a very unsettled market for the balance of the year due to the volatile copper pricing,” he says.

Newfound demand in several non-construction-related applications, including electronics, has invigorated sales of lethargic products such as beryllium copper and phosphor bronze, reports William Bohnen, president of Guardian Metal Sales Inc., Morton Grove, Ill.

David Martinelli, vice president of sales and marketing for Scott Brass Inc., Cranston, R.I., notes that automotive electronics has been particularly strong, though automakers have announced production cutbacks for the first quarter. “There has been an adjustment in consumer electronics as well,” he says. “We anticipated that we would have strong non-automotive electronics demand in December, but it didn’t materialize.”

Even telecommunications, which was very weak from 2001 through 2003, continues its recovery, says Todd Heusner, vice president of sales and marketing for Outokumpu Copper, Buffalo, N.Y. “There is still a lot of room for it to come back,” he adds.

High energy prices have spurred oil and gas exploration, and thus demand for copper, which is used both on the rigs and in electrical components used in drilling, Farmer says. Baker Hughes Inc., Houston, reported last month that the U.S. drill rig count is up about 12 percent over last year.
So amid all this strength, why the dip in the fourth quarter? Experts offer a few theories.

Andrew Keen, business unit manager for base metals at CRU International Ltd., London, attributes it to several factors. First, earlier in 2004, there was a lot of consumer restocking. “With the tight copper cathode market and the volatile prices, a lot of people were trying to buy ahead of the price increases,” he says. “The softness came when they began to get a little nervous about the price [possibly falling], as well as a genuine softness in certain end-use markets.”

Like Keen, Commerford believes the slowdown was just a little breather. “It is my opinion that customers needed to get their inventories in order. The economy restarted at a faster pace than was expected. People got aggressive and built up inventories beyond demand.”

Wayne R. Barker, president of Sequoia Copper & Brass, Hayward, Calif., however, questioned whether it was an inventory drawdown situation at all, as inventories have remained relatively low. “I think the price of metal had a lot to do with it. It led end users to only buy what they need, to rely on their distributors and not to stock up themselves.”

The fact that automakers have announced first-quarter production cutbacks to get their vehicle inventories back in line, and fears that interest rates will rise, contributed to the uncertainty early in the year. But most experts think the market’s slowdown is just a temporary bump in the road, and expect demand to firm up soon. “Quoting is brisk,” says Martinelli at Scott Brass.

Still, neither copper producers nor distributors expect this year to be quite as buoyant as last year. “I think it will continue pretty much at the same level as 2004, which means another good, solid year,” says a spokesman for Olin Brass, East Alton, Ill.

Others even forecast modest improvement. “I don’t expect 2005 to show incredible growth, but we should see some growth. There is still pent-up demand,” says Kessler.

Miele expects a more traditional growth pattern this year of 2 to 3 percent. “Any potential for downfall in private residential housing starts or vehicle sales is likely to be offset by strength in the capital spending and commercial construction sectors,” he says.

While copper supplies were tight last year, they seem to be loosening a bit, Sabol notes. “Capacity has caught up with demand. While lead times were 12 to 14 weeks in early- to mid-2004, they are now a more normal six to eight weeks. The mills are adjusting to the higher activity levels. I expect that supply will continue to be in balance this year.”

New copper mining capacity has come on-stream. A spokesman for Kennecott Utah Copper Corp., Magna, Utah, says that 2004 was the first year for some time that North American mine production did not fall. He expects mine output to increase further, with some small solvent extraction/electrowinning properties coming on line, as well as some mine restarts.

Globally, the copper market faced a deficit of 700,000 to 800,000 metric tons last year. This year, supply is expected to make up much of the ground with demand, and could even see a small surplus.

At present, however, the market remains tight. Ingrid Sternby, commodities analyst for Barclay’s Capital, London, says that while premiums from the mining companies have moderated, they remain near historical highs. Though concentrate availability has risen sharply, she adds, there may not be enough smelter capacity to treat it, as several smelters are expected to shut down for maintenance in the next six months.

“Stocks of copper cathode are low, at about 100,000 tonnes,” Commerford notes. “That has kept the copper price high. Raw materials continue to be very expensive. Our purchasing people are struggling to get enough material at competitive prices.”

The tight supply has forced mills to extend lead times an additional two to three weeks. “We really have no problem in terms of losing orders because of lead times. We just need to plan better,” Farmer says.

Contributing to the tight conditions is a shortfall of copper scrap. The domestic industry has lobbied for controls on how much copper scrap can be exported, but a petition to that effect was turned down by the U.S. Commerce Department. How much red metal availability will improve this year in the U.S. depends on a giant unknown, Sabol says—whether China begins aggressively buying scrap again after backing off for the last few months.

Even though demand will be good, copper prices will continue to be volatile in 2005, especially if the price of raw materials declines in the second half, Cerro’s Ewing concludes. “It will be a much more difficult year for managing our business than last year.”