3-2009 Copper Market Outlook
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Sheer Badness

Auto, housing and electronics markets have been particularly hard hit by the poor economy, short-circuiting demand for wiring, electrical components, plumbing and other copper and brass products.

By Myra Pinkham, Contributing Editor

The copper and brass market is one more victim of the global financial crisis and its effect upon consumer confidence and the flow of credit. Even with the array of bailout and stimulus programs enacted worldwide, most industry observers expect a rocky 2009, though they hope for at least marginal improvement as the year goes on.

There has been a dramatic decline in demand, both in North America and around the world, for copper and brass products, reports Jon Barnes, principal copper consultant for London’s CRU Analysis. Most observers estimate the drop-off at 20 to 30 percent.

“Demand for copper and brass is soft and getting softer,” says distributor Scott Immell, president of Scioto Metals Inc., Lewis Center, Ohio, blaming much of the decline on the generally weak economy and rock bottom consumer confidence. “The products we sell tend to be closely related to consumers, so if they aren’t in the market, then our demand dries up.”

Corroborating Immell’s observation, the closely watched Conference Board index of consumer confidence fell to all-time lows in February, driven by worsening business conditions and a rapidly deteriorating job market.

Copper’s decline is a reflection of the difficult conditions in the automotive, housing and electronics industries, says Tom Baker, vice president of marketing and sales for the Olin Brass unit of Global Brass & Copper, East Alton, Ill. He observes that a few end-use markets are doing well, “but they are few and far between, with most copper and brass markets being sucked down by the credit crunch, which has really hurt consumer confidence.”

“The credit crunch is the hardest part,” says distributor Lance Shelton, vice president of sales and marketing for Guardian Metal Sales Inc., Morton Grove, Ill. Tight credit not only affects demand, but also customers’ ability to pay. “It is easier to get orders than to get paid. We are not taking business from companies that need extended terms. We used to place everyone on 60-90 day terms, but we have everyone on 30 days now.”

Other than the obvious influence of the global financial crisis, one big factor that led to the sudden downturn in red metals business late last year was the collapse of copper and zinc prices, says Barnes. “This encouraged people to destock. They either froze their purchases or took minimal deliveries. There is no incentive to place orders if prices are likely to be cheaper tomorrow than they are today. That same pattern was being repeated not just in North America, but also in Europe, China and Japan.”

After peaking at an average of $3.94 a pound in April 2008, Comex high-grade copper spot prices gradually declined through September—then fell like a lead balloon, reaching a low of $1.39 by the end of last year. Since then they reportedly have stabilized in the $1.40 to $1.50 range. “It is too early to say that it has reached bottom, however,” says Barnes. “Copper will be in surplus this year, and that could put further downward pressure on prices.”

One major copper miner has expressed fear that copper prices could fall to $1.25 a pound and remain there for an extended time. “If the market goes significantly below that price, or if there is an unusual relationship with input costs, then we would have to make further reductions in our capital expenditures or production levels,” says Richard Adkerson, president and chief executive officer of Phoenix-based Freeport-McMoRan Copper & Gold Inc.

In fact, copper producers are planning to curtail production to match the weaker demand and head off further price erosion. Freeport-McMoRan, for example, announced in December that it would cut copper production by 200 million pounds (5 percent) in 2009, followed by a 500 million pound (11 percent) reduction in 2010.

Declining copper prices have affected the inventories that both service centers and end-users are holding. “We are careful what we have on hand,” says Bob Farmer, co-president of Farmers Copper Ltd., Galveston, Texas. “The price of copper fell so fast that there was no way to get inventories down quick enough. Customers were holding off their buys waiting to see if the price would go down further, which it did,” he says. “We are still ordering each day, but we are watching our quantities.”

While distributors are being more cautious, they are still buying what they truly need. Inventory management is critical, says Frank Kevane, president and chief executive officer of the Detroit-based Copper and Brass Sales division of ThyssenKrupp Materials NA. “Service centers need to either generate earnings or rightsize inventories to increase cash flow. Our real investment is our inventories.”

Red metals distributors have been hit by a “double whammy,” says Scioto’s Immell. “With copper prices and demand falling at the same time, it is taking us longer to turn our inventories.”

Sometimes inventory turns must take a backseat to customer service. “We have tried to keep our inventories lean since last fall,” says Bruce Seeger, president of Seeger Metals & Plastics Inc., Toledo, Ohio, “but we still need to be sure we have enough inventory to meet the needs of our customers.”

Service center shipments of copper and copper alloys were down nearly 8.6 percent in 2008 vs. 2007, reports the Copper & Brass Servicenter Association, Wayne, Pa. Trailing year-earlier levels for much of 2008, the rate of decline escalated in the fourth quarter. January shipments were down nearly 30 percent, including a 28 percent decline for copper products and a 31 percent drop for copper alloys.

Baker at Olin Brass says that while the automotive and housing markets have been declining for a while, in recent months the decline has been much more pronounced. “This is particularly true of automotive,” he says, noting that North American production of cars and light trucks was down 35 to 40 percent in January 2009 vs. January 2008. ‘That’s the most dramatic downturn we’ve seen in a long time.”

All companies producing vehicles in North America reported high double-digit sales declines in January. Chrysler led the pack reporting a 121 percent sales slump vs. the previous January, followed by declines of 48.4 percent at General Motors and 42.1 percent at Ford. The New Domestics didn’t fare much better with Toyota reporting a 31.7 percent drop in North American sales, Nissan a 29.7 percent decline and Honda a 27.9 percent dip.

Auto sales were worsened by the credit crunch, says Kevane. “Even people who want to buy a car might not be able to get a loan,” he says. U.S. automakers reportedly could have sold at least another 150,000 cars last year to people who would previously have qualified for loans.

In early February, GM said it expected to produce only 380,000 vehicles in the first quarter—less than half the 885,000 it made in first-quarter 2008. Detailing its turnaround plan to Congress later that month, GM said it would be closing five more of its U.S. production facilities.

Similarly, Chrysler has announced plans to reduce its production capacity by 100,000 vehicles this year.

Guardian’s Shelton says the negative impact of the automotive market on copper suppliers could get even worse if one of the Detroit Three goes out of business in the next year, which he believes is certainly possible.

Weakness in building and construction also has taken a big bite out of red metals sales, especially on the residential construction side where demand has declined by 50 to 60 percent. “Housing continues to be off and could still get slower with the credit crunch affecting the ability of consumers to get mortgages,” says Baker. Even commercial and industrial construction, which had been holding up well in comparison, is now starting to slow, he adds.

The National Association of Home Builders reported that new-home production fell 16.8 percent in January to a record-low seasonally adjusted annual rate of 466,000 units. New permits, an indicator of future building activity, fell 4.8 percent to an annualized rate of 521,000 units.

The effects of poor consumer confidence are especially evident in the electronics market, Baker says. “Until they know where things are going, consumers are not likely to buy a big screen TV or a laptop.” Corporate investment in large information technology projects has declined as well, he adds.

Even companies that do not rely heavily on the auto and housing markets for their business are reporting significant declines in activity, such as Farmer’s Copper, whose major customers are in the oil and gas and marine markets. “With the recent dampening of energy prices, I’m uncertain about what will happen in the future,” says Farmer.

The jury is still out on how the various bailout and economic stimulus plans, both in the United States and elsewhere in the world, will affect the copper market. Baker is cautiously optimistic that the market will see some benefit from the newly passed $787 billion American Recovery and Reinvestment Act.

However, many of the “shovel ready” projects funded by that legislation are not all that copper intensive, notes CRU’s Barnes. “Not a lot of copper is used to build roads or bridges,” he observes. Infrastructure programs to strengthen the power grid are a notable exception.

“It is definitely too early to talk about the prospect of recovery,” adds Barnes. “I have no idea when it might occur. It could be in the next nine, 12 or 24 months. The market is moving faster than anyone can comprehend. All that is certain is that there is very little optimism for the remainder of the year.”

In fact, he expects conditions to get worse before they get better. “Everyone—mills and distributors alike—are just in survival mode, doing whatever they can to remain profitable. Everyone is being faced with some very difficult decisions.”

There have already been some casualties on the mill side. In mid-October, Cranston, R.I.-based Scott Brass Inc., owned by investment firm Sun Capital Partners, shuttered its three plants without warning or explanation, leaving 180 employees in Indiana and Rhode Island out of work. About a month later, National Copper Products Inc., Dowagiac, Mich., also shut its doors. Since then, Barnes says, a few other smaller companies also have closed, while many have reduced workweeks or announced permanent layoffs.

Baker says Olin Brass was fortunate to have rightsized its operations shortly after Global Brass acquired it in November 2007. Still, like most other producers, it is not having fun. “We have had to cut back some of our staffing levels to support the decline in demand, but we have not had to close any facilities.”

Both producers and distributors agree that further rationalization of capacity in the copper market is certainly a possibility.

Baker is hopeful that 2009 will improve as the year goes on, especially once service centers and end-users finally get their stock levels in line later this spring. “I’m cautiously optimistic that 2010 will be better than this year, but I’m not sure how dramatic the uptick will be. It will be a long, drawn-out recovery,” he predicts.

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