Astoundingly high copper prices have given service center executives a fear of heights—and what may happen if copper suddenly falls.

By Dan Markham,
Senior Editor

Copper distributors are suffering from an epidemic of “cuproacrophobia”—a fear of heights associated with the lofty price of copper. Symptoms of this malady include confusion, disbelief and a paranoid feeling that red metal prices must surely tumble any minute.

Copper’s rebound from the soft market of the early decade continued into 2005 and 2006 with red metal prices reaching never-before-seen levels. Last month, the Comex spot price for copper averaged around $2.20 per pound, up dramatically from $1.44 at the same time last year and triple the 73 cents in February 2002. While service centers with strong inventories certainly benefited from copper’s ascent, the high price is not the reason most executives remain bullish on copper’s prospects for the rest of the year.

“The only plus is that it glorifies your sales figures,” says Scott Immell, president of Scioto Metals Inc. in Columbus, Ohio. Passing along the price increases is a challenge for service centers. “Every day when you quote customers, you wait for the silence on the other end of the phone,” Immell says.
“The prices are outlandish, to say the least,” says Bruce Farmer Sr., president of Farmer’s Copper and Industrial Supply Inc. of Galveston, Texas. “If I had any old inventory, we could have scrapped it out and made a profit on it.”

Nevertheless, “if you’ve got the material, you’re going to sell it because demand is high,” he adds.

Michael Skinner, analyst with Standard Bank of London, says the price spike may have been started by real-market demand, but it was pushed upward by traders. “Fund money has driven it, especially the last six months,” he says.
Service center executives’ biggest concern is whether copper’s eventual fall will be as steep and swift as its climb.

“My greatest fear is a sharp plummet,” says Dan Kendall, president of ABC Metals Inc., Logansport, Ind. “I’m afraid of heights, both physically and from a financial standpoint in the copper market. I don’t like to stand next to a cliff.”

Farmer agrees that a sudden drop—and the corresponding devaluation of inventories—is the greatest fear among service center owners, though he doubts that scenario will materialize. “If that happens, of course, we’re all in trouble. If it goes down a few cents [per pound] a month, it’s not going to hurt any of us too much because we turn our inventory. That can be managed.”

The high prices also affect service center cash flow, because it takes substantially more money to replenish inventory. “With the increase in copper, plus the surcharges leveled, it puts more pressure on a margin world that’s already slim,” Immell says. “It’s increased the amount of cash you need on a daily basis to run your business. Combined with interest rate hikes, it makes it more expensive to stay on top.”

Steven Buzash Jr., president of Standard Metals Inc. in Hartford, Conn., notes that cash flow has become such a problem for some distributors that they are finding it difficult to replenish inventories.

Though figures are not available to quantify service center copper and brass inventory levels, executives say stocks industry-wide are extremely low, as distributors hedge against a price drop by keeping inventories lean. “Nobody’s sitting on a pound more than they have to have,” Immell says. “Every pound you put on the floor is a bit of a gamble.”

Even Buzash, who believes in carrying a big inventory, is altering his ways. “I have the worst inventory turn of all service centers. I want to make sure I have whatever the market wants, when it wants it,” he says. Still, by the end of 2006, “my objective is to make the overall poundage on the floor smaller. I want to bleed off some of this inventory at the high values, just in case the bottom falls out. This is not the time to replace pound for pound,” he says.

Mills have felt the effects of conservative buying among service centers, though they are hopeful that demand will pick up the longer the price remains stable. “In the latter half of 2005, customers may have cut a little bit of inventory, thinking the price was going to come down,” says Al Barbour, president of Concast Metals Products, Mars, Pa. “Obviously that hasn’t happened, and they’re restocking.”

Even copper producers are finding it difficult to get the most out of the high prices. “The old motto, ‘the higher the copper price level, the better the company financial performance,’ is not true any longer,” says J.F. Dalin, president of Ampco Metal, Arlington Heights, Ill. He believes service centers have growing purchasing power, so passing along price increases is increasingly difficult.

One ever-present concern shared by red metals producers and distributors—substitute materials—is even more of a worry if prices remain at current levels.

“My biggest concern is that people will find alternative materials as this price keeps going up and up,” says Bruce V. Seeger, president of Seeger Metals and Plastics, Toledo, Ohio. “When it comes to brass rod, they might start shopping for more steel and aluminum.”

“If you quote an exorbitant price,” Farmer adds, “they may think they can get by without that copper conductivity. They’ll use aluminum or stainless, or something else, especially in the copper nickels.”

Fortunately for red metals producers and distributors, similarly rising prices for many alternate materials curbs their allure. “The typical shift over would be from red metals to aluminum, but as aluminum prices climb as well, maybe that discourages some of them,” Immell says.

An additional fear is the idea that real-world demand is not the actual driving force behind copper’s increase. “We’ve seen a lot of people motivated to use copper as an investment vehicle,” says Kendall. “You don’t see somebody like Siemens Corp. or Schneider Electric driving the market. It’s a broker in New York who’s buying and selling, and has no plans to consume.” If investors abandon the commodity, the market could retract abruptly, he adds.

Opinion is sharply divided on the likelihood of a sudden price drop, Standard Bank’s Skinner says, though he believes that slow moderation is the most likely scenario. “There’s going to be some movement downward, but I think it’s going to be gradual because there’s so much money involved.”

Nonetheless, actual demand for copper looks promising in most markets. Respondents to the Copper and Brass Servicenter Association’s year-end survey of service centers and mills forecast improving conditions in all but one market—automotive.

For the first six months of 2006, respondents expect modest improvements in shipments to stamping houses, screw machine houses, defense, telecommunications, electric/electronic, household appliances and construction/building sectors. The greatest increases are expected in defense (2.8 percent ahead of the first six months of 2005, 3.5 percent ahead of the final six months of 2005) and telecommunications (up 2.8 and 2.1 percent, respectively, vs. the first and second halves).

Buzash reports particular strength in bronze alloys for naval applications. After a record 2005, he describes his sales for January and February as “phenomenal.”

Immell says his customers in power distribution are optimistic about demand. Even the small segment of automotive Scioto handles has been fairly steady, despite the well-publicized problems faced by Ford and GM.

Domestic automakers’ troubles have not necessarily filtered down to the copper producers and distributors who supply the auto companies and their parts suppliers. Frank Kevane, a vice president at Copper and Brass Sales, Southfield, Mich., says that any dip in business has been slight.

“I think automotive as a whole is probably still building cars and trucks at close to the same rate as they have been,” says Kevane. “The automotive industry is sicker from a profitability perspective than it is in terms of output. The U.S. companies lose money selling their cars.”

Unlike with steel, where a potential shift toward smaller, more-fuel-efficient vehicles would lead to a decrease in steel consumption, the same condition does not apply to copper. Steel structural parts and body panels might shrink, but the copper-based electrical systems on new vehicles hold steady.

Greg Harrington, vice president of operations for Farmer’s, says his company’s greatest prospects are in the energy exploration market. “We’re involved with several offshore drilling associations. There are smiles everywhere we go.”

Farmer’s provides beryllium copper for down-hole tools and instruments for both onshore and offshore drilling. The market has been growing for the past 18 to 20 months, he says. Additionally, oil company executives say the cyclical industry is in the middle of one of its longest, highest cycles.

Distributors are also hoping to see a pickup in the demand for construction, household appliances and other products as a result of storm-related Gulf Coast reconstruction. But any positive impact on the copper market isn’t being felt yet, and may not for some time. The communities, particularly New Orleans, must complete the deconstruction process before reconstruction can begin in earnest.

“Unlike other catastrophes, so much of the infrastructure was just utterly destroyed that it doesn’t make sense to stock up on washers and dryers when they can’t even put a home in New Orleans yet,” Kendall says. “Near term, we will see little benefit as far as demand in the housing and appliance areas until the infrastructure is replaced in those areas that were hardest hit.”

Farmer, whose business is primarily in the South, says he is slowly starting to see some effect from reconstruction, though it’s lagging because of the delay in completing the cleanup. He’s also familiar with the other side of the equation, as one of the company’s buildings in Galveston suffered $200,000 worth of damage during Hurricane Rita.

From the mill perspective, acquiring raw materials is a persistent challenge, particularly with the high demand for scrap. Barbour says materials were particularly tight in December and January.

“We’re concerned about commodity prices and supply prices,” says Mark Comerford, vice president of sales and marketing for Brush Wellman Inc. in Cleveland. “We’ve been hit hard by energy, supplies and chemicals. They’ve gone up dramatically.”

Ampco’s Dalin believes copper producers will undergo consolidation and closures similar to the shakeout in the steel industry. His company emerged from bankruptcy reorganization last year after closing its Milwaukee facility and consolidating operations at its Arlington Heights headquarters.

Dalin foresees two trends: the further consolidation of copper and brass mills in response to their eroding profitability, and producers integrating with distribution to improve margins.

Kevane says he hasn’t seen any evidence of mill consolidation yet, but “common sense might dictate that some consolidation needs to take place.” Still, the dynamics of the copper industry, which is populated by more small, privately owned companies, reduces the likelihood of the merger and acquisition frenzy that has characterized steel. “With business being pretty decent, I don’t see any movement towards [consolidation] right now,” Kevane says.

Despite concerns about price shifts and margins, most service center and mill executives say the solid economic picture at home and abroad is reason for optimism. “The first half of the year will be extremely strong,” says Standard Metals’ Buzash.

Farmer adds: “Among our accounts throughout the U.S. and the world, we don’t find anybody really predicting a downturn in the market.”