Experts offer reasons to believe the rise in red metals has staying power.
The price of copper has jumped significantly in the past few months, lifting with it the hopes of red metals producers and distributors. But coming so close on the heels of the election, was it merely a post-election bump with nothing but emotion behind it or a sign of improving demand?
As of Feb. 20, the cash price for copper on the London Metal Exchange was just under $6,000 per metric ton, or about $2.72 per pound, up from a range of $2.10 to $2.20 for most of 2016.
Last year was disappointing for many copper and brass suppliers, depending on the markets they serve. Strength in industries such as automotive and aerospace was offset by dismal sales in energy and heavy equipment. Demand in the U.S. was mediocre, as evidenced by a 6 percent decline in imports of brass mill products, reports the Copper and Brass Fabricators Council. Service center shipments of both copper and alloy products lagged 2015 by about 3.4 percent, according to the Copper and Brass Servicenter Association. Current economic fundamentals portend a better year for red metals in 2017. In a Jan. 10 webinar sponsored by CBSA, economist Chris Steele of ITR Economics, Manchester, N.H., offered an upbeat outlook for the U.S. economy this year. Weakness in the industrial sector should be offset by healthy consumer spending, a continually improving labor market and strong housing starts, he said.
Commenting on the copper and brass market, Steele noted that prices for most commodities are on the upswing. U.S. private nonresidential construction, which is a leading indicator of copper consumption, is forecast to see year-over-year growth of 7.7 percent. “While we do expect some downward pressure over the next two to three quarters, in general we see opportunities for economic growth for the U.S. economy as a whole, and also for the copper industry,” he said.
China is one of the largest consumers of copper and brass in the world. While it’s difficult to forecast what will happen to China’s economy, China’s power generation is often used as a proxy for the nation’s general economic health. Growth in China’s power consumption suggests that its economy is accelerating, as likely will its demand for copper and brass, Steele says.
The U.S. Copper & Brass Producer Price Index is in a recovery mode. The next four quarters could see a significant sustainable rise in producer prices, alleviating some of the negative pricing pressures producers and distributors have been feeling over the past year, Steele said. “However, it’s also a time to be very conscious of pricing conditions. Keep a thumb on the pulse of the market and try to maintain a competitive pricing structure. You want to prioritize market share over margins in the next two years in order to be in a good position to weather the mild recession coming in 2019,” he added.
Joe Pickard, chief economist for the Institute of Scrap Recycling Industries in Washington, notes that red metal lagged other base metals for most of 2016, but its price saw the biggest post-election surge in November. The most actively traded Comex copper contract rose from about $2.25 a pound prior to the election to as high as $2.74 shortly after. The rise is due to expectations of copper-intensive U.S. infrastructure spending and higher domestic manufacturing output, as well as positive Chinese manufacturing data. The International Copper Study Group reports that Chinese apparent demand for copper increased by 7 percent in the first nine months of 2016.
Analysts at Goldman Sachs expect higher copper prices to gain support as increased demand from China worsens supply shortages due to labor unrest at major mines. The investment banking firm forecasts that global refined copper demand will exceed supply by 180,000 metric tons this year. The company reversed its earlier outlook from bearish to bullish, raising its six-month price forecast to $6,200 per metric ton or $2.81 a pound.
Workers at BHP Billiton’s Escondida copper mine in Chile went on strike Feb. 9. Labor issues at other mines could add to the supply disruptions. Although this could shift the world’s supply-demand balance to a deficit, the effect could be modest in the United States. Both the primary and secondary copper markets in the U.S. have ample supplies of available metal, say some analysts, who believe the market has already factored in the supply changes, the expected increase in demand from China and new Trump adminis-
tration trade policies.
While the consensus among economists and analysts points to a stronger copper market in 2017, there seems to be some skepticism down in the trenches. “Business is a little better, but not enough to warrant $2.60 copper,” says
Robert Farmer, co-president of Farmer’s Copper in Texas City, Texas. “The price just starting popping up after the election, but business hasn’t resumed that much to justify it. It could drop back later this year. There are a lot of factors that come into play.”
Given its Texas location, nearly half of Farmer’s business is oil and gas related. The uptick in the price of oil has brought some stability to the market. “Our inquiry and order levels are up a bit,” says Richard Farmer, co-president of the copper distributor. He and his brother are hoping oil will continue to strengthen well past the current price in the mid $50 per barrel range. “It’s the $60 to $65 number that’s the sweet spot,” which will trigger more drilling and consumption of copper parts, Richard says. “Considering the downturn [in energy] we saw in 2016, we came out OK, but we are hoping 2017 will be much more prosperous.”
The Farmers also are concerned about the Buy American stance of the new president. In some cases, it’s impractical. “There are no sources left for certain products in the U.S. You have to go overseas to get certain alloys and certain shapes,” says Richard. In fact, it’s a question of national security as defense contractors find themselves reliant on foreign sources for materials needed to manufacture critical parts for some military equipment. The U.S. should be able to supply its own military, “but it could take a long time for an American company to get up enough guts to add new capacity,” adds Robert.
Chicago Extruded Metals has already benefited from the Trump administration’s stance. “We are one of the few that offer aluminum-bronze in the USA now, which gives us a tactical advantage,” says Frank Prevatke, director of sales at the Cicero, Ill., mill. Companies that buy copper and brass parts in Asia and Europe are looking for alternative sources in the U.S. that can serve as a plan B in the event of new trade actions or tariffs. “A lot of corporations have been buying cheap from China, but they realize they need to plan for the future. We’re their safety valve. Customers want us to be their second source. We’re OK with that,” he adds. Chicago Extruded Metals anticipates a big bump in sales this year due to the improving conditions in the copper market and the company’s specialized focus on supplying non-commodity alloys and customized near-net shapes.
Norman Lazarus, senior vice president of NBM Metals in Houston, sees this as the beginning of a sustained uptrend for the business. “I think copper has staying power,” he says, predicting the price will remain in a healthy range from $2.50 to $2.75 per pound this year. Various factors will support stronger copper, including the improving prices of other commodities, such as oil and gas; growth in demand from China, “which is the locomotive that pulls the market”; lower output from mines in Chile and Peru, which will reduce supply relative to demand; and, most notably, the new business-friendly administration in Washington. “Just about every company I have visited has a far more positive outlook,” he says. “It’s quite dramatic compared to what we have seen for the past six or seven years. It’s like somebody flipped a switch and said now we can get back to work.”
Al Barbour, president of Concast Metal Products, Mars, Pa., is also bullish on 2017. Business activity at his company started to pick up a month or two before the copper price spiked last fall, which suggests it may be as much demand-driven as election-driven. “We had some customers who saw that price move and thought it was time to stock up,” he says. “I think many service centers believe we have seen the bottom, so there is not as much risk to carrying inventory.”
Barbour forecasts modest growth for Concast in 2017 based on a healthy economy and an energy market “that has turned the corner.” He also sees demand slowly growing for the company’s lead-free alloys, “particularly with all the coverage related to lead in the drinking water in Flint, Mich., and the situation with the aging infrastructure in this country,” he says.
Is the copper price for real? “Sometimes we make decisions based on our emotions. People see a more positive environment for manufacturing. Whether that turns into new business opportunities, we will see over the next few years,” Barbour says.