Copper Market Report:
Prices Higher Than Prospects

Red metals distributors reported mixed results in the first quarter during last month’s Copper and Brass Servicenter Association annual meeting in Phoenix, along with unanimously deep concerns about their prospects for the rest of the year in the face of severe copper price volatility.

Copper prices have more than doubled traditional levels in the past two years, and remain highly unstable. Copper distributors, and their customers, remain conservative about purchasing because of the unpredictable nature of pricing.

Today’s volatility and complex market conditions force buyers to take into account far more variables than at any time in the past 20 years. “It’s a daily guessing game,” said Garret Herringdon, general manager of Southern Copper & Supply Co. Inc., Pelham, Ala.

In recent months, the Comex spot copper price dipped from about $3.14 cents per pound on Dec. 1 to $2.51 on Feb. 1, rebounding to over $3.61 by late April. The dramatic, 63-cent drop in January and February prompted some large customers to bypass service centers and place large orders directly with the mills, but the dollar jump in March and April sent them back to distributors, reported service center executives during a press conference at the CBSA meeting.

In that respect, copper distributors actually benefit from the price volatility, noted Dan Kendall, president of ABC Metals Inc. in Logansport, Ind. “Many customers are afraid to buy in mill quantities for fear the price will drop the next day, so they buy just what they need from the local service center.”

Similarly, distributors are also placing smaller orders with their suppliers to cut down the inven­ tory risk. “Everybody is playing the Comex game on when to replenish their inventories,” said Herringdon.

He noted that as market conditions squeeze inventories, availability becomes tight in certain product areas. In fact, executives agree, service center red metal inventories are so lean, they could come up short of material to meet customers’ needs in the event of a big surge in demand.

The nature of copper distributors’ business is shifting, as companies find themselves handling a greater number of smaller orders, with more value-added processing. Customers want more value-added service and just-in-time delivery at the same time they reduce the size of their orders. This increases the relative labor cost as the volume of orders grows, while the volume of material shipped declines, adding to pressure on service center margins.

Some service centers see a change in their product mix brought on by the exit of domestic suppliers from certain product segments. Wolverine Tube Inc. has closed tube and bar plants in Jackson, Tenn., and Montreal, Canada, and Revere Copper Products Inc. has announced the closure of its New Bedford, Mass., plate and sheet mill over the next six months.

In response, IUSA, Mexican parent company of Cambridge-Lee Industries Inc. in Reading, Pa., plans to bring a new heavy copper bar extrusion mill online in the second quarter, said Dan Erck, Cambridge-Lee vice president.

To source some products today calls for placing a large, 40,000-pound order with a foreign mill that requires a 20-week lead-time. “With copper prices changing every day, that’s a lot more exposure than picking up 2,000-pound quantities from a domestic supplier,” says Joe Walton, president and CEO of Williams Metals and Welding Alloys Inc., Wayne, Pa.

As the escalation in copper pricing swells the value of transactions, it also raises concerns about bad debt. Cash management has become a bigger issue for both service centers and their customers. “We deal with a lot of small machine shops who place lots of small orders. For many, the rise in the price of copper has doubled the cost of their parts. We’re concerned that they have good enough financials to absorb the added cost of this product, and that they’ll have the ability to pay their bills,” Herringdon said.

The fortunes of individual companies vary distinctly by product line, markets served and geography.

For example, California-based Earle M. Jorgensen Co., which is now part of Reliance Steel & Aluminum Co., experienced a very good first quarter, though its brass volume declined slightly due to market softness in brass rod, said Diane Wallace, regional merchandising manager for EMJ.

Farmer’s Copper, which carries a diverse product mix and is located in the Gulf Region, had an outstanding first quarter due to strong demand from the petrochemical, marine and electrical industries, as well as ongoing hurricane reconstruction, said Dick Farmer, president of the Galveston, Texas, company.

ABC Metals, located in the Midwest and specializing in copper strip, has been more affected by weakness in the automotive, homebuilding and household appliance markets. Kendall is concerned about the outcome of upcoming automotive industry labor negotiations, and their effect on the health of domestic automakers. ABC Metals is working to do more business with the New Domestics. “The transplants are far more loyal to suppliers, once you get qualified,” he said.

Erck said the economy seemed to gain momentum in the first quarter, and he is optimistic about growth through the first half. Cambridge Lee forecasts 10 percent growth in its second-quarter shipments, notably in extruded products.

Microscopic marketing weapon
The copper industry may be just months away from securing a major new marketing weapon for its arsenal.

Representatives from the Copper Development Association in New York offered CBSA members an update on their years-long effort to gather enough scientific test data to prove that copper has intrinsic antimicrobial properties. They hope to gain federal regulators’ approval of such product claims later this year.

CDA scientists claim that copper has natural germ-fighting properties capable of killing 99.9 percent of all bacteria that comes in contact with the metal within about two hours. They believe their research shows that the use of copper alloys in hospitals and other health care facilities, in such applications as handrails and door push plates, could significantly cut the rate of transmitted infections, saving lives and millions in health care costs.

CDA officials emphasize that copper marketers cannot legally make such product claims until after EPA approval, which the industry hopes to secure in September. At that point, it will be up to producers and distributors to work together to convince hospital administrators and architects to embrace copper as the material of choice for various surfaces, often replacing stainless steel.

On the legislative front
Joseph Mayer, president and general counsel of the Copper and Brass Fabricators Council Inc. in Washington, D.C., offered a report on legislative initiatives with the potential to impact the copper market.

For one, the CBFC is opposed to a proposed California law that would require plumbing fittings to be virtually lead-free. The proposed measure would limit the lead content in fittings to 0.25 or one-quarter of 1 percent, down from the 2 to 3 percent that is typical in approved plumbing fittings today.

Mayer criticized the proposal as unnecessary and arbitrary, saying it uses a “precautionary principle” to impose a “prescriptive standard” with no scientific basis to quantify its health benefits, or the health risks in the lead standards currently in use across the county. CBFC officials hope California’s governor opts to stick with the current national standard, but he may accept or modify the measure. “In any event, we have to be prepared to fight it on a national level,” Mayer said.

The CBFC has also appealed to the U.S. Department of Commerce in favor of the U.S. assessing countervailing duties on copper imports from China. In a recent reversal of its 20-year practice of not applying countervailing duties to countries with non-market economies, the Commerce Department recently applied the law in a case involving imports of coated paper. Copper industry officials would like to see similar action toward their product, and support passage of the proposed H.R. 1229, which would open the door to countervailing duties on all imports from non-market economies. CBFC also supports S. 974, the “Stopping Overseas Subsidy Act,” which likewise would extend countervailing duties to imports from China and other non-market economies.

The U.S saw a five-fold increase in imports of copper and brass mill products from China from 2003-2006, Meyer noted, due in part to government subsidization of its domestic industry. Because China lacks sufficient copper raw materials, the Chinese government must further subsidize the purchase of foreign copper and copper alloy scrap, distorting the U.S. supply and price. In 2000, only 214,000 metric tons of copper scrap were exported to China, but this surged to 553,000 tons in 2003 and stayed at that level through 2006.

“CBFC members can compete against the best in the world, but they cannot compete against nations that provide huge subsidies and other unfair advantages to their producers. Illegal subsidies distort competition, regardless of whether the economic system in which the subsidies are employed is a market or non-market economy,” Mayer said.