For the better part of a year, economists have warned the U.S. economy could be in store for a downturn in 2019. But for the copper industry, the future is now.
When it comes to tracking the economy, the price of copper can tell you a lot. High prices typically mean healthy demand, and when consumption of a versatile metal like copper is up it typically translates to an active and healthy economy. That’s not always the case, of course, but when the copper price drops, as it did in the second half of 2018, experts agree that it can be a sign of things to come.
According to Catherine Putney, an economist at ITR Economics, the copper price can also be a barometer for the health of the overall economy, as well as a key indicator of future economic performance. For her, it’s all about demand.
“When demand starts to diminish in a slowing economy, that drives prices down,” she recently told Copper and Brass Servicenter Association members during the organization’s annual outlook webinar. Declining prices could be a bad sign for the economy, and a reeling economy could also be bad for the copper market, according to Putney. “We expect in the next couple months that copper will decline because of limited demand. That’s going to drive that price down.”
The reason Putney anticipates limited copper demand is because her firm forecasts slowing growth in the overall economy in 2019. Not to be confused with a recession, which most economists define as two consecutive quarters of GDP decline, this slow growth period will still have wide-ranging effects on both the consumer and industrial economies.
ITR’s outlook for the U.S. industrial economy projects just 0.5 percent growth in 2019 and 0.7 percent growth in 2020, after growing 4 percent last year. The three main contributors of ITR’s Industrial Production Index are manufacturing, mining and utilities.
“There’s very similar movement to the U.S. GDP, where we’re seeing a really runaway, positive train going on in the U.S. industrial economy,” Putney said. “But we are on the crest of that wave. We are seeing the signs that this positivity is going to slow down in 2019.”
Martin Little, executive vice president of sales and marketing at Concast Metal Products, Mars, Pa., says the gloomy economic forecast is definitely on his company’s radar. “We’re very in tune with it,” he says, noting that Concast works with an economic firm for predictive information. “They kind of compare our business to economic trends and segments in general, and they advised us that we would see a downturn this year.”
Demand for everything from consumer to capital goods could take a hit as a result of the slowdown, ranging the spectrum of red metal end markets. The implications have caused copper manufacturers such as Concast to downgrade their forecasts for 2019.
“We expect our core business to be down a little bit this year,” Little says, adding the company is working on several new projects to offset projected losses. “We have a purchased product business, in addition to our core products, and those are markets that present nothing but growth for us. We’re expecting to see some growth in those products this year that should more than compensate for any downturns in our core business.”
And while certain markets or product lines could thrive despite the downturn, Putney noted that manufacturers of all sorts should be prepared for a slowdown. “Given the nature of your business, you’ll probably feel it a little bit harder in 2019, depending on how you move with the macroeconomy,” she told CBSA members. “What we’re seeing are signs that are pointing toward decline.”
One of those signs is the price of copper. Riding positive momentum from 2017, the price of copper rose to a high of $3.30 per pound in June before bottoming out at $2.56 per pound on Aug. 15. Since then, the price has recovered and stabilized some, posting $2.80 as of Feb. 15.
But while market fundamentals tell you that price is indicative of demand, the actual relationship is a bit harder to pin down. Case-in-point, demand was up last year.
The demand piece
Despite a drop in the commodity price in the back half of the year, demand for red metal was mostly positive in 2018.
According to the Copper and Brass Servicenter Association, shipments of copper and brass products were up in 2018. Mill product shipments for the copper and brass industry increased almost 3 percent last year, with the largest gains coming from the copper plumbing tube and copper bar segments. Strip, sheet and plate and rod and bar shipments were up slightly over 2017 levels, while shipments of commercial tube were down slightly.
Service center shipments were also up through most of 2018. Before revamping their reporting procedures in October, CBSA reported that warehouse shipments of copper and copper alloys through September were up 8.2 percent.
Little says 2018 started with a bang but settled into an average year overall. “I would best describe it as front loaded,” says Little. “The year started out unbelievably well. January, the first quarter, was tremendous, and then it settled back into what I would term as a fairly average year. But, given the fact the first quarter was so strong, it was a good year for us.
As one of the largest producers of continuous cast copper alloy products, Concast’s customer base spans many of copper’s major end markets. For the most part, demand has been positive across the board. Little adds that all of the segments Concast sells into, whether it be construction and construction equipment or aerospace and oil and gas, were strong last year.
Concast also sells heavily into the distribution market, which Little says was very active in 2018. “Our distributor network has been busy,” he says. “All of our customers were strong.”
Red metal distributors reported sales and volumes increases last year, and many maintain positive outlooks for some key copper end markets.
Dan Kendall, president of ABC Metals, Logansport, Ind., says copper sales and volumes were up last year, with copper-containing products also making up more of the company’s product mix than in years past. He sees the electrification of key end markets as a boon for copper consumption.
“Automotive electronic content continues to grow faster than raw sales,” says Kendall, noting that, despite a slight decline in total vehicle sales last year, the amount of copper used per vehicle increased. “We see the copper content of vehicles increasing by 5 to 7 percent. That’s offset the decline in the per unit production.”
This increase in copper content is directly linked to the rise in electric-vehicle technology, which is expected to have a dramatic impact on copper demand over the next decade. According to the International Copper Association, there will be an estimated 27 million electric vehicles on the road in 2027, compared with 3 million in 2017, raising copper demand in EVs from 185,000 metric tons in 2017 to 1.74 million metric tons in 2027. The ICA adds that each EV charger will add 0.7 kilograms of copper, with fast chargers adding as much as 8 kilograms of copper each.
When it comes to the construction market, Kendall notes that the smart revolution will be another positive for copper demand. Wireless and Wi-Fi technology is spreading throughout the home, and Kendall says this technology has a high percentage of high-performance copper alloys.
Christy Metals also saw healthy demand last year. The Northbrook, Ill.-based copper distributor saw its pounds sold increase about 13 percent year over year, according to vice president Lance Shelton. And while he too notes solid automotive business and a demand spike related to recent hurricanes, he says the growth in his company’s business is also related to increased market share.
“Some service centers have gone away, and that’s kind of helped from a distribution standpoint,” Shelton admits. “A couple distributors are no longer in business, and somebody has to take that business.”
Merger and acquisition activity has been up in the copper industry, with Wieland’s purchase of E. Jordan Brookes Co. being the most recent example of market consolidation.
Shelton, who is also the incoming president of the CBSA board of directors, says there have even been recent examples of M&A activity within the organization’s membership. “At CBSA there are a couple distributors that are no longer around,” he explains. “They’ve been acquired, or there are some that just went away.”
Joe Napolitan, vice president of sales for the brass rod division of Mueller Brass, Port Huron, Mich., says the more the industry consolidates, the more important it is for a company to find good companies to work with. “It gets back to your relationships and making sure that you’re aligned properly with supply chain partners that prevent any disruptive forces like that,” says Napolitan, who is also the incoming CBSA board vice president. “I think that’s also a reason why you want to have participation in associations. They give you the opportunity to align yourselves and network and get information from industry peers.”
Kendall is wary of any moves in the industry that resemble vertical integration, though, he also sees consolidation as an opportunity. “It concerns me, but in some ways it emboldens me because I think that distribution has a better pulse on the copper consumer than the mill does,” he says.
Dicky Farmer, co-president of Farmer’s Copper, Texas City, Texas, agrees. “If we have a good relationship with the companies that are merging, in some cases, yes, it has helped us,” he says.
Hedging your bets
During her presentation, Putney advised CBSA members to take some time to think about how the downturn might affect their business and prepare. “The silver lining in all of this is that you know it’s coming,” she said. “The upcoming downturn will be mild and it will be brief, but you should prepare yourself for a slowdown, know it’s not going to last forever and have all hands on deck when capacity comes online again in 2020.”
To protect against price volatility and inventory devaluation, service centers such as ABC Metals and Christy Metals hedge their copper. “We’re taking future position to keep us neutral in our ins and outs,” Kendall explains. “When the copper is volatile, we have financial strategies that protect us and our customers. And when you’re talking about companies that aren’t hedged, if they buy high and sell low, giving up of 15 to 20 cents a pound is painful.”
Shelton agrees. “We hedge so that we don’t take the hit when the price of copper falls,” he says, adding that another approach to protect against volatility is turning your inventory quickly. “From a distribution standpoint, we want to turn our inventory as much as possible, because if we have a bunch of inventory that is four to eight months old, it could be 50 cents a pound higher than what we can sell of it now,” he explains. “We want to keep our turns as high as possible so that we can get that old material off the floor.”
Other companies, such as Farmer’s Copper don’t hedge, but that doesn’t mean they are sitting idly by. Farmer says his company is aware of the economic predictions and is taking steps to prepare. “We’ll probably monitor our inventory levels and make sure that we’re not overstocked in certain product lines and be conscious of pricing,” he says.
Despite the warnings, distributors and producers alike are mostly optimistic about their prospects in 2019. However, a company’s fortunes are ultimately tied to their individual circumstances.
“We sell a lot of bushing bronze to the repair industry, and there are always going to be repairs going on,” says Robert Farmer, who is also co-president at Farmer’s Copper. Still, he too is conscious of the potential impacts of a down economy on overall business. “We may not see some really big orders out there for some project that may have already come and gone. There might not be some of that later on in the year.”
Despite his concerns that the economic downturn could have a whipsaw effect on the manufacturing industry in general, Kendall is still projecting a good year. “We expect growth for us, and we expect that to be double digit – not 20 percent growth, but it will be more than 9 percent.”
Shelton is similarly optimistic. “We’re forecasting 8 percent growth this year,” he says, noting that his company’s projection isn’t necessarily indicative of the red metal market as a whole. “We obviously compete with other distributors, so we try to gain market share from other distributors. That’s going to be part of that 8 percent, it’s not just brand new business.”
Beyond 2019, Kendall is not worried about copper’s prospects. He sees the “electrification of the economy” as a positive sign for future copper demand. “It’s just where the economy is going.”