Many people won’t bend over to pick up a penny in the street. But when the price of copper moves up or down by a penny, it catches the attention of an awful lot of folks in the electrical wholesaling industry.
That’s because a tiny price change of a few pennies per pound is enough to impact the value of a warehouse loaded with tons of copper wire. And when copper prices drop 10%, as they did earlier this year, it sets off alarm bells in the offices of electrical distributors, manufacturers and independent manufacturers’ reps who make a big chunk of their living from selling copper-based wire and cable. Wire and cable accounts for no less than 15% of all electrical products sold through electrical distributors, according to Electrical Wholesaling’s sales data.
There’s no better example of this than the fact that when the owner of one Top 200 electrical distributor retired part-time to a golf condo in Palm Springs, he still wanted to stay in touch with the company’s daily financials, so he had his company’s computer system customized to provide daily reports on line items per order, sales, net profit per order and, yep, the daily price of copper.
The daily price of copper is linked to a fascinating array of global economic and at times political factors that could probably provide the base for a pretty interesting movie or spy novel. The cast of characters includes Wall Street traders waiting to pounce on inefficiencies in copper pricing that they can game to make a killing on copper futures; global financiers and government officials (at times) calling the shots at mining companies; and even the copper thieves wreaking havoc on construction sites who risk electrocution for the few bucks they might make on stolen copper. A strike or a flood at a key mine at the very source of the market is enough to directly influence copper pricing on the world’s commodity exchanges: the London Metal Exchange (LME), the Commodity Exchange Division of the New York Mercantile Exchange (COMEX/NYMEX) and the Shanghai Metal Exchange (SHME).
To be sure that movie or novel on today’s copper market is completely up to date, you would need to include some of the folks who run China’s bonded warehouses in Shanghai and other parts of China, which store thousands of tons of copper. This copper is used as collateral to back financial deals by financiers who have no intent to use the copper in these contracts for new construction projects in China or in the manufacture of copper-based products. Just how much copper is in these warehouses is the subject of all sorts of speculation, but it’s apparently enough to swing copper pricing around the globe. It’s estimated that China accounts for 40% of the entire world’s copper demand.
Thinking about the geopolitical ramifications of volatile copper pricing makes your brain hurt if you think about it too much. If you can’t figure it out, you are not alone. The CEO of one of the largest specialty distributors of wire and cable once asked a bright business associate who had a doctorate degree in the economics if it was possible to consistently forecast the price of copper if you factored in everything that could potentially impact the price of copper, including mine production, strikes, political unrest in key copper-producing countries, estimated demand from construction and he got a simple, one-word answer: “no.”
John Mothersole, director of research for pricing and purchasing service at IHS Global Insight, Washington, D.C., is a man who has tracked the ups and downs of the red metal for much of his career as an economist and has as a good a read on copper pricing as anyone on this planet. But even he can’t always figure out where copper pricing is headed. He once told the audience at a McGraw-Hill Construction Outlook that because of its volatility, copper was the “bane of his existence” as an economist.
Many metals market experts say the rapid growth of the Chinese economy as the single largest consumer of copper and the difficulty of getting good data from China on exactly how much copper it uses and how fast its economy is growing or contracting may be the key accelerant sparking the copper market’s volatility. While economists don’t seem to have a good feel for just how much the Chinese economy has softened over the past 12 months or so, they do agree China isn’t buying as much copper for nonresidential construction and other key production end uses. That decrease in demand has apparently led to a market surplus in copper, and lower prices overall.
What’s particularly perplexing with the current pricing cycle is that economists and analysts are uncertain if China’s decrease in consumption is related to slackening demand for copper from its construction and manufacturing industries, or is somehow related to China’s growing use of copper as collateral for other financial reasons, which according to a recent Wall Street Journal article could account for anywhere from one-third to over half of its purchases of copper. According to that article, “Much of the copper stored in China, the world’s biggest consumer of the metal, is used by companies and investors as collateral from banks and other lenders. They then invest the money in higher-yielding investments.”
Xan Rice, commodities correspondent for the Financial Times, said in a video on www.ft.com that while China’s import figures for copper were healthy in 2013, “They are not indicative of physical demand. There is a decoupling.”
Jeff Turner, V.P. of metal procurement, Southwire Co., Carrollton, Ga., said recently that some Chinese banks have defaulted and this practice is “unraveling.” “That game is not there,” he said, “A lot of copper is coming back out onto the market. That is copper that has been tied with that temporary demand.”
Steve Garner, sales manager at Ventcroft Ltd., Liverpool, United Kingdom, a manufacturer of fire and security cable, fire and intruder control panels, voiced his concerns regarding China’s impact on the copper market in this post on Electrical Wholesaling magazine’s LinkedIn page:
“At the moment there is an over production of copper. Add to that China’s ad-hoc approach to market trends and stability. I feel worse is yet to come. Price of copper will be getting less as China’s economy starts to fail, as it is doing.”
The Chinese government’s announcement in late March that it would attempt to stimulate the country’s economy seems to have boosted copper prices back over $3/pound (at press time), and some metals analysts are sticking to their forecasts of $3.30/pound pricing that they made before copper’s 10% decline. General Cable said in its 2014 financial guidance that it’s working with assumption of $3.32/pound for copper. Where copper will end up in 2014 is still tough to figure. A blog post by a Seeking Alpha contributor named “Itinerant” republished at www.copperinvestingnews.com said metals analysts are “pretty unanimous in their absolute price floor of $2.72/pound.”
One report from Moody’s Investor Service published on Dec. 16, 2013, did forecast sub-$3 a pound prices for copper in 2014. An article at www.marketwatch.com on the Moody’s report said,“Base metals will remain near 2013 levels in the next 12 to 18 months, with copper prices averaging ‘at most’ $3 a pound next year,” and included a quote from Carol Cowan, a company vice president, that is in tune with copper pricing at press-time:
“Continued slow global economic growth, surplus inventory and investors’ subdued interest in the metals commodity sector will prevent any material upward movement in (base metals) prices in the next year or so,” she said in the MarketWatch post. “We believe 2013’s price decline has bottomed, but prices in 2014 will on average be lower than 2013 levels.”
It’s this uncertainty rather than any specific price drop that often makes customers hesitant to make a purchase, says Greg Donato, COO, Omni Cable Corp., West Chester, Pa. He says that as a distributor of specialty wire and cable, Omni Cable doesn’t get too involved with building wire, where people have the biggest pricing concerns. But he says customers are more hesitant to make wire purchases when the price of copper is fluctuating more than usual.
“When copper starts to jump around like it is right now, we don’t necessarily see an immediate impact, but people will get a little bit hesitant. They will say, ‘Is this the bottom, or should I hold off and wait to buy? Is it going to go any lower?’
“If an opportunity has a large amount of copper in it and you see prices dropping 10%, that may influence some purchasing decisions, especially if the project is not classified as an immediate need.
“From our perspective, that’s really the only immediate impact that we see. Even though we manage a very large copper inventory daily, we do not speculate on the long-term or short-term movement of copper. Our goal is to put the electrical distributors in a competitive position daily on their specialty wire and cable needs.”
In his post at Electrical Wholesaling’s LinkedIn page, Ed Harvey, sales manager at William. B. Bleiman and Sons, Inc., Conshohocken, Pa., said the copper situation in China complicates an already challenging market for anyone selling wire and cable. “This is troubling on several accounts, given that copper has become a speculation tool as well as it is a core commodity, central to what we do in the electrical industry,” he wrote. “This ‘inflation’ in copper positions in China brings another level of uncertainty to a business that lacked real confidence to begin with. Several people have pointed to low levels of inventory in the LME (London Metal Exchange) and wonder what they know that we do not.
“I have not had anyone tell me what their worst fears are, but I suppose something like $2.50 would be the lowest acceptable without serious impact. If you own it you fear $2.50. If you have a project and have not bought yet (there is a lot of that!) I suppose you are rooting for $2.50 (or below). Myself, I just want stability.”