Copper and Brass Report
Weak Price Tarnishes Outlook
By Tim Triplett
on Mar 18, 2016
Spirits are as low as the copper price in some markets. The Chinese get blamed for many of the world’s woes, from currency manipulation to exploding hoverboards, but this time there is no denying their culpability.
China accounts for 42 percent of world copper consumption, compared with 28 percent for the U.S. and single digits for all other countries. When China’s runaway economic growth finally began to slow, its cutback in consumption created a global oversupply of commodities, including copper, that caused their values to plunge.
Since peaking at $4.60 a pound in 2011, the price of copper has declined by 55 percent, briefly dipping below $2 per pound in January. In the past year alone, the price of the metal has plunged from around $3 per pound, losing about a third of its value.
The effects on producers and distributors of copper products in North America have been severe. Belt-tightening is the order of the day. Many forecast little or no growth for the next couple of years.
How individual companies fare will depend on the market segments they serve, some healthier than others.
“Other than pockets of aerospace and defense that are doing fairly well, there is not much positive for copper,” says Richard Farmer, co-president of Farmer’s Copper Ltd., Texas City, Texas. His company is located in the Houston area, which has been particularly hard hit by the energy downturn. “The Houston market is very depressed with oil and gas being so low. It’s really pretty scary out there right now. A lot of our customers are just holding on and waiting it out.”
Fortunately for Farmer’s, he says his company sells nationwide and serves a diverse customer base, so it is not totally dependent on the Gulf Coast energy market.
Norman Lazarus, senior vice president of NBM Metals in Houston, describes market conditions as “very tight and difficult right now.” There is some strength in markets such as automotive, aerospace, marine and medical, but they are becoming a lot more competitive.
“Certain sectors are a little more buoyant, so everyone is chasing after them. There is a lot more slicing and dicing going on,” he says. NBM has increased its value-added offerings, now offering machining services to its customers. “Diversification becomes an important play, both in products and in markets.”
Lazarus foresees a flat to negative red metals market over the next few years, mirroring other commodities. “Everything is cyclical, but I predict we are looking at least at another two years—and it might be three—before we see a reasonable bounce coming back for copper.”
Al Barbour, president of Concast Metal Products, Mars, Pa., says two main factors are influencing the market, the sharp decline in copper prices and general anxiety over the direction of other commodities, in particular oil and gas.
“There is a lot of uncertainty out there about whether it will go up, down or stabilize, which makes people think about what they are going to buy. How much your business is dependent on the weak markets like energy has a lot to do with your situation,” he says.
Concast’s output in 2015 was about the same as the prior year, as weakness in some sectors was offset by gains in others, and Barbour is optimistic about 2016, especially toward the second half of the year. “I think it will improve, particularly in an election year.”
Industry data reflects the challenging market conditions and downturn in consumption. U.S. service center shipments of copper and brass products declined by 3.9 percent last year, compared with 2014, according to the Copper and Brass Servicenter Association. Shipments of copper sheet, plate, rod and pipe dipped by 3.1 percent, while brass sheet, plate, bar and pipe shipments were off by 4.6 percent.
The Copper and Brass Fabricators Council reported an 8 percent decrease in U.S. imports of brass mill products in 2015, while U.S. exports declined by about 4 percent. Copper and brass consumption worldwide in 2014 totaled 5.25 billion pounds, about the same as the prior year, according to the Copper Development Association. The total figure for 2015 is not yet available from the CDA, but most likely will show a decline given the weakness in China and other world economies.
The copper and brass industry overall is not really growing, says Amy O’Shaughnessy, marketing manager at Revere Copper Products Inc., in Rome, N.Y. Copper strip, sheet and plate last year grew by just 1.5 to 2 percent. Copper bar and rod went down by 15 percent. It’s difficult to predict what will happen in 2016, she says. “With this shrinking demand, when one company does well, it may be more about market share than market growth.”
Revere announced last month that it will stop producing brass extruded products to focus on casting and rolling 100-series copper alloys. The company plans to shut down the extrusion mill at its facility in Rome by the end of this year.
Revere sells about 40 percent of its volume through service centers. Sales to these distributors suffered last year as they cut back on purchasing to work down their overpriced stocks, which sometimes meant selling them at or below cost.
“Even if you are somewhat hedged, that’s a challenge,” O’Shaughnessy says. She believes most distributors were over-inventoried to start 2015, but have managed to right-size their stocks for 2016. Pointing to a positive sign, Revere saw service center orders begin to pick up at the end of last year, and that bump continued into the first quarter. She is relatively optimistic going into 2016. “We are hoping Revere can be successful this year in a market that we don’t expect to grow. We expect the overall volume to be pretty similar to last year. Right now we are seeing more activity to start the year, and that feels good.”
Christy Metals, Inc., Northbrook, Ill., started 2016 on a similarly upbeat note with January sales up a bit over the first month of 2015. “We are optimistic. We have some contracts signed this year. We are not tied to oil and gas, which is taking a beating. Automotive and electronics have stayed strong with us,” says Lance Shelton, Christy’s vice president of sales.
Christy Metals finished 2015 about even with 2014, in terms of pounds sold. Of course, dollars decrease even when pounds increase in a declining price environment, Shelton points out. The Comex price last January averaged $2.66 a pound; this January it was $2.02.
How does Christy deal with such volatility?
The company hedges part of its inventory and focuses on a goal of five inventory turns per year, he says. “We just keep our turns as high as possible so we aren’t sitting on material for a long time, even if we sometimes have to sell it at breakeven or even at a loss. You can’t sit there waiting for the price to go up.”
For a distributor, there’s always tension between the desire for a lean inventory and the need to have material on hand when a customer calls. The consequence of a too-lean inventory is lost sales.
“That’s been a huge goal of ours, to increase our inventory turns, but we also want to make sure we have enough material on our floor to serve our customers. We want to have the stock they need,” Shelton says, echoing other service center executives.
Customer expectations of just-in-time service require distributors to have various sources of supply today, which makes their relationships with the mills especially important.
“We have great mill support. You can’t be a great distributor without great mills,” Shelton says. Christy Metals tries to source most of its material domestically from just a handful of mills, but must import some products occasionally.
Consolidation of the copper industry over the past few decades has dramatically reduced the sources of material, and some types of copper and brass are no longer produced in the U.S.
“We used to spread our business around more, but now we are more focused on teaming up with certain mills,” Shelton adds. “Rather than using five or six mills, if you do business with two or three, you have more buying power and become more of a partner with them.”
Other distributors are another key source of supply. Sales between service centers, even rivals, is commonplace in copper, where intra-market trade helps to reduce redundant inventories and streamlines the supply chain.
Christy often sells to, and buys from, other service centers. Sometimes it makes more sense to buy an item from a competitor than to put a slow mover on the shelf, Shelton says. “Even though we are competitors, we still work together when a customer needs it.”
Shelton forecasts a 5 percent increase in Christy Metals’ sales in 2016, at least in terms of pounds. “In terms of dollars, I can’t tell you. I don’t have a clue,” he says of the copper price. Christy does not speculate. “Christy Metals was built on service and delivery. We are not in the business of making money on copper. We make money on service, slitting, stocking, delivery and quality. The goal is to break even on copper each year.”
Farmer’s Copper buys as much as it can domestically, but it imports some items from France and Germany. “There are certain products that certain mills no longer produce, or the ones that did went out of business,” Farmer says. Mills are specializing in various niches where they know they can make money. “Any more you can’t just buy from one mill and get an array of products. You have to shop around. For a service center, it’s tough. If you are buying from overseas, you have to build container-sized orders.”
Relations between mills and service centers are not always totally harmonious, executives say. The difficult market conditions sometimes prompt mills to seek out new business even among smaller customers normally served by distribution. Mills competing with their service center customers is another sign of the difficult market conditions.
Adding to the pressure that mills feel is the strength of the U.S. dollar relative to foreign currencies. It makes foreign goods cheaper and inhibits U.S. exports. Revere has felt a significant effect from the strong dollar.
Mills in other parts of the world have a built-in competitive advantage. “Service centers can source copper goods overseas at a different price level as the dollar changes, and that impacts us,” says O’Shaughnessy.
There is one upside to copper’s down price—it becomes more competitive with other materials, such as aluminum and plastics, which helps to keep substitution at bay, say suppliers.
“We are often faced with customers re-engineering to use aluminum,” says O’Shaughnessy at Revere, but not so much lately. Likewise, copper roofing material is winning more bids for construction jobs. “If the price of copper gets down closer to the alternatives, they tend to go with copper to get a roof that lasts 100 years,” she says.
Dave Dickens, CEO of Three D Metals Inc., Valley City, Ohio, is realistic about the copper price. “If you look at other commodities, I think copper still has a way to go before we hit bottom,” he says. Three D will remain focused on inventory management. “Our turn rate is very high. Our exposure to metal is very short-term. It obviously hurts when copper is on a five-year slide, but when it bounces, we will be poised and ready.”
Last month, Three D acquired Williams Metals and Welding Alloys, Wayne, Pa., a marriage of two strong companies that should help both weather the storm, Dickens says. “We feel comfortable that we are strong enough and diversified enough to get through these low times. It’s a cyclical business. When it comes back we will be stronger and better with a bigger footprint.”
Most prognosticators expect copper to trade in the $2.10 to $2.15 range for much of the year, but given the complexities of global trade and the unpredictability of speculators, no one can know for sure.
Michel, at the Copper Development Association, offers no prediction on the copper price, but adds, “I do believe we are close to the bottom. Our mining members think there is some upside now.” Farmer’s plan for 2016 expresses a common sentiment among service centers. “Hold on to what we’ve got and wait it out. Maybe we will start to see improvement toward the end of this year.”
Antimicrobials Not Spreading as Hoped Despite the lower cost of copper, demand for antimicrobial products has been disappointing so far, admit producers and distributors of the products. Research sponsored by the copper industry in 2006-08 proved that copper has the natural ability to kill up to 99.9 percent of harmful bacteria that come in contact with the material.
In 2010, the U.S. Environmental Protection Agency certified the industry’s claims and registered copper for its antimicrobial properties. The industry hoped that would open the door to widespread use of copper in facilities ranging from hospitals and nursing homes to schools and government buildings.
If widely applied to door push plates, bed rails, tray tables and other touch surfaces, use of copper products could translate into a major reduction in hospital-acquired infections, claims the Copper Development Association.
But adoption of antimicrobial products, which still cost more than conventional alternatives, has been frustratingly slow, says James Michel, manager of technical services for the CDA. Winning the spec for a capital project takes time, and getting an institution to retrofit the existing hardware in a hospital, or even one wing of a hospital, is a hard sell.
“First you have to make them believe, then they have to pick up the pen and do something. A lot depends on their capital programs,” Michel says.
“Some hospitals are starting to embrace this, but we need to see it in much more rapid numbers than we are seeing today,” says Amy O’Shaughnessy, marketing manager at Revere Copper. CDA has put a lot of effort into spreading the news and defining the data that can legally be used to market the product, she says, “but we need stronger language that we can use to force the hand of hospitals to make this change. We are all just dying for this to take off. It certainly is not for a lack of effort by the industry.”
There are no stats on how many pounds of antimicrobial products are shipped each year, but it could be merely a few truckloads industry-wide at this point, she estimates. The market is tiny so far, but the potential is as huge as the threat of hospital infections.
“The volume in terms of pounds is minimal, but we remain hopeful,” she says.