Softening demand and unstable prices have left copper and brass distributors with concerns about 2007.

By Myra Pinkham,
Contributing Editor

Due to spotty demand and a retreat in speculation, copper prices are about 40 percent lower than last May when they briefly crashed through the $4 per pound barrier. Most observers still expect a relatively strong 2007, though it remains to be seen whether the price correction will be enough to improve order activity and ward off further material substitution, particularly in certain construction applications.

“The year is off to a slow start,” says Tom Baker, vice president of marketing for Olin Brass, East Alton, Ill. “Demand softened late last year, and that softness has carried into this year.” He attributes much of that softness to the well-publicized downturns in the housing and automotive sectors. Some markets are off as much as 10 to 15 percent, with overall demand for copper and brass products down 5 to 10 percent, he estimates.

Other sectors continue to consume copper at a strong pace, however, including oil and gas, off-road equipment and segments of the electrical, electronics and telecommunications markets, executives report.

One notable bright spot, capital spending, continues to be robust, observes Tom Funkhauser, vice president of sales and marketing for Hussey Copper Ltd., Leetsdale, Pa. “It appears that in 2007, companies are going ahead with capital spending projects using the profits they made in 2006. Should that slow, the market could decline even further,” he notes.

David Martinelli, marketing manager for Scott Brass Inc., Cranston, R.I., attributes some of the market’s weakness to increased caution by customers—both end-users and distributors—due to the volatile copper-pricing environment.

Copper prices averaged $3.09 a pound in 2006, up nearly 85 percent from the 2005 average of $1.68, reported Stephen T. Higgins, president of Phelps Dodge Sales Co. during his company’s recent fourth-quarter earnings conference call. (Phoenix-based Phelps Dodge Corp. will soon be acquired by Freeport-McMoRan Copper & Gold Inc., New Orleans, creating a copper mining giant.)

“Historically low refined copper inventories, significant production disruptions and increased fund (hedging) activity contributed to the unprecedented price levels,” he said.

The Comex price of high-grade copper cathode (as reported by American Metal Market) started 2006 at $2.17 per pound and steadily increased until late May, when it spiked to $4.08. It remained just below the $4 threshold for the next few months before gradually edging downward through the third quarter to an average price of $3.53 in August. During the fourth quarter, it declined more significantly to a December average of $3.10. One of the most dramatic declines was a fall from $2.98 on Dec. 29 to $2.63 on the next trading day (Jan. 3). Since then it has hovered between $2.40 and $2.65 per pound, where it remained in mid-February.

Another factor contributing to the run-up in copper prices from 2005 to 2006 was a big increase in purchases of scrap and cathodes by mills in China, Funkhauser notes. Exports of copper scrap to China have since eased, though he points to possible recent signs of renewed buying activity. The Bush administration rejected an industry trade case a few years ago to control U.S. exports of copper and brass scrap to China. “That was a shame. China wreaks havoc in the marketplace when they are buying,” he adds.

Demand for scrap promises to be a growing factor in copper pricing this year, predicts Jon Barnes, an analyst with London-based CRU. “We suspect that the scrap issue will be a big problem in 2007 as China is coming back into the market in a big way.”

Copper’s unpredictability has dampened order activity in the past two quarters. “Customers haven’t been purchasing a lot of products, and because of that there wasn’t a large order backlog going into the year,” says Martinelli of Scott Brass. “Customers have been hesitant because of the volatility. They think the market will go down further, but they aren’t sure.”

“People have been holding off purchases until they absolutely need the metal, when their inventories get too low,” concurs Frank Kevane, president and chief executive officer of the Copper and Brass Sales unit of ThyssenKrupp Materials NA, Detroit. “They’ve been waiting to see if prices go lower, but truthfully they can only hold off a few weeks before they need copper products. They are running very lean inventories.”

Service centers are similarly cautious about buying. “The high copper price has mandated that service centers put a careful lid on inventories. Now, with prices falling, they want to move out their high-priced material,” says Donald M. Commerford Jr., senior vice president of Revere Copper Products Inc., Rome, N.Y.

“We are just replacing what we need. We don’t know what the market will do,” agrees Richard Farmer, co-president of Farmers Copper Ltd., Galveston, Texas. “We’ve been having to sell off our high-priced inventories just to move them out,” he adds, which has hurt margins.

Kevane seems less concerned about the price fluctuations’ effect on inventory values. “We sell our metals at the market price, reselling based on today’s cost. While we might lose a little on the way down, we made profits on the way up. It all balances out,” he explains. He will remain relatively unconcerned even if the price falls a little further, he adds. “I always felt that fundamentally $2.25 a pound was a fair price. Investor demand had driven it to false highs. We are now at a more sensible level. The market fundamentals are still strong.”

Brass mills generally see the new, lower copper price level as a positive step. “With supply and demand as it was, copper should never have gotten into the $3 to $4 range,” says Olin’s Baker. “I would like copper to continue to trend down, to go back to the old days when it was 75 cents a pound. It would be good for all of us, but I don’t expect that to happen any time soon.”

Moderating prices make copper and brass less susceptible to product substitution. While there was some early substitution in areas that could move easily from copper to aluminum and other less expensive materials, future shifts are likely to be slow and incremental, since few alternatives can duplicate copper’s unique characteristics, executives agree.

There has been a sharp shift to plastic products, as well as to aluminum multi-layer pipe, for plumbing and other applications, notes CRU’s Barnes. “The copper industry is doing everything it can to limit this, but it is very difficult with the copper price so high—especially with the weak housing market. Substituting away from copper is a way of cutting costs.”

Now that prices are “much more reasonable,” Commerford says, he hopes for renewed demand. “There will be some movement back to copper, especially for construction products. It is approaching the building season, and the more favorable price will give customers more confidence in copper. More copper products might be specified.”

Funkhauser isn’t as confident that will happen. “Architectural demand won’t come back immediately. Copper is still $2.50 a pound, and most architectural applications were specified with 85-cent copper. This is something that will plague us all through 2007. Unless the price continues to fall, we won’t see any improvement this year,” he maintains. Nevertheless, 2007 should be a good year for copper sales overall, he adds, though down a bit from a strong 2006.

Globally, copper demand increased 5 percent in 2006, according to CRU. The United States had a strong first half, a weaker third quarter and an even worse fourth quarter, compared with relatively steady demand in other international markets. “It would be very hard for the market, both globally and in the United States, to show the same level of growth this year,” says Barnes. “Worldwide it is holding level with small gains, but with a weak construction market, it could be a tough year for U.S. brass mills.”

Members of the Copper & Brass Servicenter Association, Wayne, Pa., predict that red metal distributor shipments to the construction industry will be off by 2.7 percent in the first half of 2007 vs. the second half of 2006, and down an even steeper 4.3 percent vs. the first half of 2006.

Some observers remain optimistic about the economy and metals demand in 2007 as a whole. U.S. industrial production is forecast to grow 2 to 3 percent this year. “While we do not expect a sharp turnaround in construction activity or automotive production, we agree with most analysts that the worst of the current correction is behind us,” says Phelps Dodge’s Higgins. “While residential construction has suffered, nonresidential construction spending increased around 14 percent in 2006, and will likely continue to grow this year.”

Baker, at Olin Brass, sees a glimmer of hope for residential construction. “There is some indication that housing has bottomed out and is starting to work up again,” he says.

The National Association of Home Builders, Washington, D.C., reports that builder confidence is at its highest level since June. “Builders are still cautious as they continue to manage their inventory, but their assessments of the demand side of the single-family market are improving,” says Brian Catalde, who is president of NAHB, as well as a homebuilder in Playa del Rey, Calif.

The automotive market could also see an upturn later this year, Baker says, noting that vehicle inventories are being flushed out of the system.

Consumer confidence also may give the market a boost, Farmer says. “I think things will start coming back once there is more certainty, not just about prices, but what is happening internationally [in Iraq and the war on terrorism].”