Element of Surprise
Copper Reaches New Heights
An eight-month climb in the price of copper and brass material has forced producers and distributors to reconsider their approach to business.
By Dan Markham, Senior Editor
For the past five years, members of the copper and brass supply chain have been riding the red metals roller coaster, hanging on for dear life through the material’s stomach-wrenching price swings. More recently, copper executives have found themselves on the copper ski lift, which has known only one direction—straight up.
In mid-February, the Comex price of high-grade copper hit $4.62 per pound, its highest point in history, capping a steady 60-percent climb from $2.80 levels the previous June.
Such turbulence follows decades of relative stability in the copper world. “Many years ago, if it varied from one day to the next it might have been by a penny,” says Dick Farmer, president of Farmer’s Copper and Industrial Supply, Galveston, Texas. “Now it’s doing these nickel and dime swings every other day. We are starting to get accustomed to it.”
It Takes a World View to Sell Copper
Copper executives from mills, service centers and OEMs across North America long for the days when copper prices were fairly stable and predictable. Today, the law of supply and demand is repeatedly broken, supplanted by economic intrigue, irrational exuberance and wild speculation in global copper trade. Factors other than demand and consumption have driven the metal’s price to unprecedented heights.
On Feb. 14, copper hit $4.62 per pound on the Comex exchange, an all-time record. Few would be surprised if that record were surpassed in the coming weeks or months. Nor would anyone be shocked if the bottom suddenly fell out. Industry veterans have grown accustomed to sharp, unexpected swings in copper’s price over the past four years. They have learned to manage through the uncertainty.
Dan Kendall of ABC Metals, current president of the Copper & Brass Servicenter Association, is a prime example. Kendall is just as concerned about what’s happening on the other side of the globe as he is about events on his Indiana doorstep. He has made a study of the macroeconomic trends that affect copper prices and has launched a blog on his company’s website (http://blog.abcmetals.com/) to give daily perspective on these issues from the view of a North American distributor.
Following developments around the world has always been a part of the business. But once, it could be done monthly. Today, it requires almost daily vigilance, he says. He pointed to the recent turmoil in Libya with threats to pull out of OPEC, predicting the effect on gas prices and wondering how that would impact red metals consumption through lower levels of disposable income.
Kendall’s original inspiration to share his ideas with others was driven by the U.S. economy’s collapse in 2008, which went unforeseen by most so-called experts. He figures as the author of his own blog, he can’t do any worse.
Commenting on forecasts of global supply deficits in copper and brass, Kendall says his own examination of the situation suggests such a scenario is unlikely. “The warehouse stocks in the LME and Comex haven’t dropped significantly like there’s an impending shortage. Actually, they’ve climbed some since September of last year. If we were driving into a shortage, you’d think we’d start to see it now.”
Instead, he believes that any interest rate hikes will increase the costs of taking a position on copper, making the market less attractive and driving some of the speculators away. When that happens, “the price will find its true level,” he says.
Ultimately, the goal of his study of these macroeconomic trends, and the blog that results, is to help nurture a better-informed circle of stakeholders around ABC Metals, including its employees, its vendors, its bankers and its customers. “The smarter the customers are, the more likely they are to understand where our moves are coming from, and they’ll be more intelligent consumers,” Kendall says.
The wild oscillation of the past half-dozen years, and the near-daily increases of the past eight months, have become routine for red metals suppliers. “It’s a part of what you deal with every day,” says Al Barbour, president of Concast Metal Products, Mars, Pa. “It’s just an added dimension to how you do your business.”
The causes of the price fluctuations are many, though not always rational. Demand from developing countries has sparked some of the increase. The influence, and unpredictability, of the enormous Chinese market has also added to the magnitude of the price swings. Finally, and most disconcerting to industry executives, is the effect of speculators jumping in and out of the market as they try to capitalize on the commodity. The net result is “a world where copper’s out of control,” says Tom O’Shaughnessy, marketing manager for Revere Copper Products Inc., Rome, N.Y.
Even though they have gotten somewhat accustomed to it, the unpredictable pricing still challenges industry executives, and in some cases changes behavior. The most obvious effect is their reluctance to take on inventory for fear the price will suddenly return to earth. “Every purchase order that you let for inventory is done with some trepidation,” says Mark Wolma, president of Nonferrous Products Inc., Franklin, Ind.
Long lead times cause the same anxiety in Garret Herringdon, general manager of Southern Copper and Supply Co., Pelham, Ala. “Our deliveries from the mill can be up to five months out. I don’t know what copper’s price is going to be at the end of that cycle.”
It isn’t just a risk of falling prices that keeps buyers out of the market. Many smaller companies simply don’t have the cash or credit to finance their inventory. If a mom-and-pop shop can’t get an extension of credit from their still-wary banker, they may not be able to afford what they once kept in stock.
“When copper was about $2.25 per pound to stock [including carrying costs], it took nearly $250,000 to stock 100,000 pounds,” says Dan Kendall, president of ABC Metals, Logansport, Ind. “Now, with copper up in the $5.25 to $5.50 range to stock, that same amount takes about $500,000. So a company’s ability to finance growth can be limited by the bank’s desire to lend.”
Either by choice or by bank fiat, “customers are buying exactly what they need,” says Herringdon. “They’ve got restraints just like everyone else.”
Upstream, producers have equal concerns about the material’s price tag and how it affects them. O’Shaughnessy says the company has two ways to effectively manage the price. “In our fabrication business, where inventory is so dominated by Comex, [the high price] places a major strain on our cash flow. And there are only two things you can do—increase your fabrication revenues or tighten your terms and conditions.”
Surcharges tied to the price of the material have allowed the company to get something of a handle on the price. “If copper’s up, it’s up, and if it’s down, it’s down,” he says of the surcharge. “That balances our needs with our customers’ needs.”
Many producers are also testing out the second half of O’Shaughnessy’s equation—terms and conditions. “Terms are going to be the hot issue for the next six to 12 months. It will take a little while before people wake up and realize we can’t live like this,” Kendall says.
For example, Hussey Copper recently announced it was cutting its payment terms to net 30 days to get paid more quickly, a move that others may follow. “You see a tightening at the mills, companies asking for net 30 on payment terms. That used to be the exception in the market,” says Joe Walton, president of Williams Metals & Welding Alloys, Wayne, Pa.
Not everyone will be able to pass through such tighter terms, particularly if the customer is a much larger entity with significant buying power. “Whether it’s the distributor or the smaller manufacturer, someone’s getting squeezed on terms,” Walton says.
Even at a company such as Materion, which specializes in smaller orders of niche high-end products such as beryllium copper, the price can be an issue. “It doesn’t play as much of a role for us, but it is absolutely a concern,” says Richard Trate, vice president of sales and marketing for Materion, formerly known as Brush Wellman, Mayfield Heights, Ohio. “The copper is kind of a pass-through for us, but it can impact our margins negatively. And if it gets too expensive, people look at alternative materials.”
Material substitution is another concern raised by copper’s outsized price, though how big a concern is debatable. Many argue that a mature market such as copper has already suffered many of its losses to cheaper products. Plastics and other more affordable materials have made substantial inroads in places where copper was vulnerable.
“Substitution was already there on the markets that are down,” says Walton, pointing to residential construction as the chief example. Makers of copper roofing, gutters and plumbing have already taken their lumps. Nevertheless, if home and commercial building perks up while copper’s cost remains disproportionately high, then the market could continue to be hit, says Revere’s O’Shaughnessy, whose company still has an important stake in the architectural market.
In other areas, copper’s intrinsic properties of conductivity and wear resistance, plus its light weight, insulate it against competitors. “Our material generally has a mechanical purpose or wear capability, so substitution is not easily done for our product,” says Barbour.
The same is true for electrical components, Walton says. “What’s the trend for semiconductors? Are they making them bigger? You can’t substitute in those products. You’d have to re-engineer them.”
O’Shaughnessy says the issue of product substitution frequently comes down to a true analysis of the costs and whether a manufacturer is only concerned about the short-term expense. “Anybody paying attention to life-cycle costs is probably going to continue using copper,” he says.
But there is a tipping point on almost any product. Trate notes that copper remains the favored material for bushings on large pieces of mining equipment, primarily because it requires less maintenance than a steel bushing. “Right now, they might be paying a 5X multiple [for copper]. But if that became 10X, then it might be worth it to tear the machine down and do the greasing. So it’s really not in our interest to see the price get too high.”
So how do companies manage through the pricing minefield? At Revere, O’Shaughnessy says, it requires a commitment to improving the efficiency in which the product moves through the supply chain.
“What we’re directing our efforts at is creating a value chain that emphasizes speed to market. How do you increase the turns, whether at the mill, at the distributor or at his customer?” he asks.
It does no good to simply pass the risks of holding inventory either up or down stream, as that doesn’t change the cost picture. Instead, the entire chain must be committed to a more dynamic form of communicating their needs and how each member can serve the other.
“The high price of copper is very challenging in terms of cash flow. If you can do the same volume of business on half the copper inventory in the value stream, that’s a big deal,” O’Shaughnessy says.
Tom Werner, vice president of sales and marketing for Olin Brass, agrees that getting the material to the customers quickly is paramount in this environment. “We have to support our customers at these lower inventory levels. Our delivery performance is crucial. When you promise that order to that customer, it better well be on time,” he says.
Along those lines, any inability of the mills to supply the needs of distributors and end-users is a major concern. “When you look at the supply chain, one of the greatest risks is availability,” says Wolma. “It’s looming, and it’s something we’ve all got to fear.”
Maximizing scrap utilization also is crucial with copper well north of $4.50 per pound, says Werner, whose company is in the process of relocating its headquarters from East Alton, Ill., to Louisville, Ky.
Service center executives espouse many of the same management principles as their mill counterparts, in terms of improving communications and streamlining the supply chain. Kendall at ABC Metals says service centers must be able to convince customers they can’t expect 2008 fabrication costs with 2011 copper prices. He tries to keep his company, and his customers, informed about the many forces affecting the global copper market via his company’s website (see sidebar on page 11).
Herringdon says the key for distributors to navigate through the high prices is flexibility. “You’ve got to be fluid. You’ve got to be able to stop on a dime,” he says. “You can’t think like you did 10 years ago. The people who aren’t able to change the way they do things aren’t going to last.”
Buffering the concerns over the material’s cost is the generally positive direction of demand. With the exception of residential and commercial construction, most of the copper and brass end-markets began to recover at some point last year, at least compared to their universally poor performances in 2009.
“Automotive almost died, oil was low priced and consumer electronics was soft. Two-thirds of our aerospace business was retrofit, and they were pretty much just parking airplanes in the desert,” recalls Trate, describing his company’s major markets during the recession. “All of these markets came back, and since the supply chain was about empty at the end of 2009, 2010 exploded.”
In some cases, producers had trouble keeping up with demand, partly the result of labor cuts during the downturn. Today, most mills report they’ve ramped back up to full production and staffing levels.
That includes Houston-based National Bronze & Metals Inc., which opened a new foundry in Lorain, Ohio, in 2010. That facility, which quadrupled NBM’s production capabilities, is now running close to full capacity, says Norm Lazarus, senior vice president of NBM.
The new foundry’s increased capabilities have allowed NBM to gain greater share in products used for high-tech applications. Other markets getting stronger include marine, aerospace, nuclear, and oil and gas, he adds.
Power-related markets, a main use for copper products, have also made a comeback. “The electrical markets seem to be strengthening, and that can go all the way from cable wrap to switch gear to transformers,” O’Shaughnessy says.
Other suppliers point enthusiastically to the opportunity from electronic components in consumer products. “The electronics market has probably led the recovery’s charge,” says Wolma.
Moreover, in the big picture, copper’s hold on that market seems secure. “The market trends that are driving the business are helping us,” says Trate. “People want higher quality, which we’re seeing in devices like smart phones. And companies like Verizon and ATT have to do the warranty on those phones, which costs them billions, so they want to work with us to put better material in them. That’s driving the business toward higher-value products.”
At Olin Brass, gains in 2010 were driven primarily by automotive and ordinance. The company saw shipments increase 10 to 12 percent vs. 2009. Executives there expect growth to be more moderate but still meaningful in 2011.
And that is largely the view of others in the industry. “I don’t like to project more than six to 12 months out, but definitely the rest of this year looks very nice,” says Lazarus. n