Caution: Price Volatility Ahead
By Dan Markham, Senior Editor
Though demand for copper and brass products has accelerated following a stalled 2009, uncertainty over copper’s fluctuating price leaves red metals suppliers anxious about the road ahead.
With 2009’s bumpy market conditions in the rearview mirror, North America’s copper producers and distributors are expecting a smoother ride in 2010. So why the white knuckles on the wheel?
While sales of most copper products are gaining ground, industry executives say they expect random and unpredictable fluctuations in the price of copper to continue thrusting potholes in their path.
|CBFC: China’s Copper Scrap Policies Unfair
When it comes to copper scrap, China is happy to welcome it in, but reluctant to let it go. The Copper and Brass Fabricators Council, Washington, D.C., is challenging China’s policies governing this valuable raw material.
In late December, the Chinese Ministry of Finance announced plans to continue its 2009 practice of allowing duty-free treatment of copper scrap imported into China, while imposing heavy taxes on exports of copper scrap.
The effect of these measures is the draining of copper scrap from the United States to China and a greater supply of copper scrap in China for manufacture into value-added products for export. These shifts in volume mean an increase in U.S. producers’ costs for copper scrap and prices for downstream products. At the same time, Chinese producers’ costs for copper scrap and prices for downstream products are lowered, the trade group contends.
“China has had this tax policy for a number of years now, and the severe trade imbalances being generated as a result are very disruptive and not sustainable,” says David A. Hartquist, CBFC president and general counsel.
In addition to an export tax of 15 percent, buyers of Chinese scrap are being hit with a value-added tax of 17 percent, Hartquist says. “As easy as China has made importation of copper scrap by not charging any import duties, the Chinese government’s imposition of prohibitively high export taxes, equal to 32 percent of the copper scrap’s value, ensures that there are virtually no exports of this valuable raw material from China. The council is reviewing this situation very closely for possible violations of China’s international legal obligations at the World Trade Organization.”
Further complicating matters, Hartquist notes, is the tendency for China to behave inconsistently in regards to scrap procurement. The country’s appetite for scrap ebbs and flows, resulting in periods of relatively easy scrap access and low prices and times of high prices where scrap is tough to find. “Our concern is over the long term,” he says. “The Chinese impact on the market is so substantial and so unpredictable.”
Hartquist is encouraged that the Commodities Future Trading Commission will hold hearings this month. While the initial focus of the hearings will be on silver and gold, the council is hopeful the copper market will also be explored during the talks.
Copper’s Comex spot price took a historic nosedive in October 2008, falling more than $1 per pound in the course of 30 days. Since then, the wild ride has only continued. Over the past year, the price of the material has bounced between a low of $1.50 per pound and a high of $3.33, with few periods of stability. Distributors have seen the metals price swing an average of 19 cents per month, wreaking havoc on their ability to plan their purchasing.
“It’s just so volatile,” says Garret Herringdon, general manager of Southern Copper and Supply, Pelham, Ala. “Within the last two weeks it was $2.85 and now it’s $3.13. When you get those kinds of swings, it’s really hard to stock your inventory.”
That concern is prevalent throughout the industry. “The price volatility factors into people not wanting to stock inventory,” says Scott Immell, president of Scioto Metals, Lewis Center, Ohio. “When you get these big swings in metal on a day-to-day basis, it has a big impact [on buying].”
The frustration of the price swings is only compounded by their unpredictability. In the past, most copper and brass distributors had a fairly good idea where the price was going and could plan their buys accordingly. Those days are over, possibly for good.
“It just seems like a wild guess, even from the guys who are supposed to know,” says Bruce Seeger, president of Seeger Metals and Plastics, Toledo, Ohio. He recalls receiving an e-mail from a mill executive one afternoon telling him to “forget everything we said” just that morning.
The fact that the material’s value is no longer tied as closely to supply and demand is frustrating to all of the players in the chain, says Joe Walton, president of Williams Metals and Welding Alloys, Wayne, Pa. “If the U.S. economy recovers, then there’s actual demand. But if the U.S. economy tanks, the price of copper can go up anyway because investors are seeking a safe haven in the commodity instead of the dollar.”
The value of the dollar, the behavior of the Chinese copper market (see sidebar at right) and the involvement of speculators are among the factors outside the supply-demand equation that are influencing the price. Whatever the causes, the effects on running a business are significant.
“Usually you look at the trend in the last four years. December was usually the low point and it would climb from there. But this year, December was the high point. None of it makes any sense,” Walton says.
Frank Kevane, CEO of Copper and Brass Sales, Southfield, Mich., says the price volatility is a relatively new issue, occurring for about the past six years. “Prior to 2004, copper had traded in a pretty tight band. But in the last four or five years it has ranged between $4 per pound and $1.30 per pound.”
Moreover, the mechanism used to price material is subject to change. “It’s a different landscape than it used to be. Copper bar used to be priced off domestic replacement,” says Walton. “Now, people are quoting off foreign, prior month metal, inventory value, etc. You didn’t have that before. There’s a broader range of pricing in the marketplace.”
Some executives believe this new uncertainty is here to stay and could add pressure on prices if service centers begin to look at this volatility as a cost of doing business and factor it into their quotes.
Attitude on the rebound
Mirroring most manufacturing sectors, nearly all copper and brass markets suffered in 2009. “There were a lot of difficulties last year. I would say it was kind of across the board, all products and geographies, though Canada was a little better for us than the U.S.,” says Kevane.
For Farmer’s Copper in Galveston, Texas, the struggles of 2009 couldn’t have come at a more inopportune time. “We were especially hit hard because we were coming off the hurricane,” says President Dick Farmer.
Many in the supply chain saw signs of life as 2010 approached. Al Barbour, president of Concast Metal Products, Mars, Pa., says business began to pick up for his company during the final two months of the year. “I don’t know how much real demand is underneath it at this point,” he adds, noting that customers may just be trying to fill holes in their inventories ahead of higher prices.
Based on both the capriciousness of the price and overall uncertainty about demand, any restocking is limited. Burned by falling prices at periods in 2009, and perhaps short on cash, few service centers are rushing to refill their shelves.
“There’s been some restocking, but the restocking has been laser-guided and focused,” says Dan Kendall, president of Logansport, Ind.-based ABC Metals. “It’s customer specific and not industry or segment specific.”
Caution will be the operative strategy for some time, say distributors, as fickle prices and fuzzy forecasts keep supplies lean throughout the chain. Despite this wariness, the general mood among service center operators and their customers is fairly optimistic. Other than the home construction market, which remains dismal, most other end-markets for copper and brass seem to be improving.
“Customers seem to feel better about what’s going on. I don’t think it will come back to the way it was for quite a while, but we had a good January, and February seems to be fairly busy,” says Seeger.
“There was a little trend upward in the second half of the year, and we’ve kind of picked up that pattern again. Most people are projecting better things, though maybe not until the second half of the year” adds Immell.
Kendall observes that his customers are expressing more optimism about the market conditions than his suppliers are willing to concede. “My customers talk about new work being let and see order books starting to fill. But the producers are not confident in the current recovery being touted in the news and by various government sources. Extending lead times is their response rather than increasing capacity through investment,” he says. Others say they do not see lead times as an issue at this point.
Among end-markets, the most promising is the sector that fared best through 2009—power generation and distribution. Walton says his company actually had a pretty good year as his customers, heavy on power transmission, were relatively immune from the struggles of the other markets. With continued emphasis on improving the nation’s energy grid, that sector promises to get even healthier.
“We didn’t see the benefit of the stimulus dollars into power grid upgrades and substation work. They didn’t get the dollars they were counting on, but that doesn’t mean they’re not coming,” Walton says. “The good news is those projects are still pending.”
For distributors whose customers serve the energy market, any activity is a good sign, whether it’s the growing alternative markets of solar and wind or the president’s recently announced intentions to restart the country’s nuclear energy program. “You still have the same usage of copper, regardless of how they make the energy,” Walton says. “You’re going to use wind energy? Fine, you still need transformers. You still need substations. Once it’s generated, all of the other products come into play.”
“Copper is increasingly in vogue in efforts to increase power distribution, whether its wind or solar or in cars. All of those servos need to be copper,” adds Kendall.
Seeger is skeptical of the effect of the stimulus money, in part because many state governments are in such dire financial straits. Several power distribution customers in the Toledo area have hit difficult times because “they’re not getting the backing they once thought they’d have. Everybody went into a crunch, whether it was state or federal.”
In the automotive market, where copper continues to make minor market share gains, the outlook is up from its abysmal state at the start of 2009. As Kendall notes, auto production during the second quarter of 2009 annualized to only about 4 million cars, “practically nothing,” he says, compared to the 16 million produced in recent peak years. The auto build improved in the second half, though, and remains on a modest upward swing.
The difficulties of the past year have created one positive for the copper supply chain. Most years, particularly ones characterized by such price volatility, the copper industry would face the additional threat of material substitution. But such threats are virtually non-existent in the current industrial climate.
“There’s not enough horsepower within an organization to lead a substitution drive,” says Kendall, pointing to the personnel cuts that were common among all industries. “There just isn’t a strong effort or groundswell to substitute other materials for copper or other alloys.”
Those same factors led to a relatively quiet year on the merger and acquisition front, though United States Brass and Copper, based in Downers Grove, Ill., did acquire nearby Guardian Metals in July.
Small competitors are not out of the woods yet, however. “As the economy picks up, people will need more cash to run their businesses, and that could be a problem for some. It’s not uncommon in a recovery,” Kevane says.
“I’m seeing the potential for people not being able to support the resurgence in business. There will be opportunities to increase share as the market continues to consolidate,” Kendall agrees.