Buyers are prepared to order cautiously in 2002
By Tom Stundza, Executive Editor -- Purchasing, 3/7/2002 2:00:00 AM
Copper and brass mills and distributors are more than ready for a pickup in demand, but buyers reckon it won't happen anytime soon. Less than a third of the coppermetals buyers polled by PURCHASING Magazine expect to boost acquisitions through first half 2002. Laura Sanderson, purchasing manager at Ajax Magnethermic Corp. in Warren, Ohio is one buyer who is planning to reduce purchases of copper sheet and strip "until late in the second quarter." She notes that "there is no immediate vision of new-order growth" from the industries that buy her firm's heavy-duty induction heaters.
Incoming orders improved in February for only 18% of firms that buy copper and brass mill products. "Conditions in electronics are improving slowly but certain end-use sectors are still lagging," says purchasing manager E.R. Hokison at Tech-Etch Inc. in Plymouth, Mass., which makes intricate, light-gauge metal parts by photoetching copper and brass sheet. Mary Ellen Triplett, purchasing manager at Cascade Microtech Inc. in Beaverton, Ore., agrees that "new-order business is continuing on a downward trend" for her firm's high-technology equipment that tests the silicon wafers that become integrated circuits.
Another buyer looking to cut back on copper sheet, strip and tube bookings in the months ahead is Bob Roth, purchasing agent at RoMan Manufacturing Inc. in Grand Rapids, Mich. Reason: "The North American market for resistance welding equipment is down." RoMan makes power sources for resistance welding apparatus.
It isn't just industrial and commercial products manufacturers who are holding back on coppermetals buys. New-order bookings are down 20-25% for Wall-Lenk Corp., says Tom Reese, purchasing manager. The Kinston, N.C., firm makes woodburning kits and other tools for hobbyists.
Fifty-two percent of the buyers polled by PURCHASING are engaged in inventory reduction programs. Only 5% plan to boost stocks this half with the remaining 43% content to maintain existing in-house stocks and to buy product as needed. Sherry Dobbs, a buyer at Mile High Equipment Co. in Denver, says "Our sales are down so management is tightening the screws on purchasing to buy less copper and brass sheet and copper tube, and to centralize buying power with other companies under the Enodis umbrella." Mile High Equipment makes commercial ice-making equipment and is one of several firms owned by Enodis, a London-based commercial food service equipment conglomerate.
Copper cathode producers—and downstream mill products executives—generally agree with a projection by Arthur Miele of Phelps Dodge Corp. that U.S. manufacturing will perk up during second quarter so "a copper recovery is likely to occur by mid-2002." The senior vice president of marketing at the Phoenix-based firm, the world's second-largest copper producer, says "Based on conversations with large-volume customers, the market seems to have found a bottom" in fourth quarter 2001 and first quarter 2002. "Looking to the future, direction of the copper market will be determined by strength and timing of the recovery in manufacturing later this year," he adds.
Prices look pallid
As long as global producers hold to their pledges to reduce output and the global economy picks up as expected, Miele expects copper prices to rise as the year goes on. "Prices are likely to average 70-75¢ for the year, and settle at the high end of the range by year end,'' he says. Copper cathode averaged 72¢/lb on the London Metal Exchange (LME) last year, compared to 82¢ in 2000. That brought the U.S. cathode price average down to 77¢/lb, delivered, in 2001 from 88¢ the year before.
On a monthly basis, LME copper hit 63¢/lb in October 2001, its lowest 
level since 1987, and threatened to go lower until several global copper producers, lead by Phelps Dodge, committed to cutting production in 2002. LME copper averaged just 68¢ in January, and the full-year consensus forecast of the metals mavens has been revised to 74¢.
This is important to buyers since cathode tags—whether LME, New York Commodity Exchange or domestic producer—determine the base price for processed and fabricated copper and brass mill products. And average sales prices for rolled, drawn and extruded copper and brass mill products dropped some 6.5% last year. Sixty-eight percent of coppermetals buyers polled by PURCHASING Magazine believe mill product prices have bottomed, but only 7% expect to see increases as the first half progresses. The other 32% forecast further declines in transaction tags until second half.
The buyers' consensus view dovetails with a forecast from research house AME Economics in Sydney, Australia, which sees weak pricing for copper and copper-based products for some months to come. "Copper and downstream product purchasing worldwide will remain depressed until the end of the year, when only a tentative recovery is expected," according to AME Economics. "Faltering economic conditions once again mean that the world copper market is faced with price-depressing capacity surpluses and high levels of inventory."
Analysts estimate that global copper consumption declined 6.5% in 2001 to 14.3 million metric tons (from 15.1 million in 2000). In North America, the decline in demand was even steeper from such copper-intensive sectors as construction, manufacturing, automotive, and electronics and electrical equipment. It is estimated that regional consumption contracted 13% to three million metric tons (from 3.5 million in 2000).
A key factor in last year's decline is the collapse of the dot-com economy. The information technology revolution of the 1990s gave a tremendous boost to demand for copper wire, cable, sheet and strip for such products as heavy-duty data communications cable and intricate copper-based components inside computers and mobile phones. Copper alloy use in the domestic electronics market grew almost 48% from 238 million pounds in 1995 to 351 million pounds in 2000. When the IT spending bubble burst in 2001, demand among high-tech users of coppermetals collapsed. And while modern, high-tech industrial production has become very copper intensive, there has been a dramatic slowdown in capital spending on new high-tech equipment.
World copper production didn't slow as quickly as demand, however, resulting in a higher-than-expected cathode surplus of 575,000 metric tons for the year. Smelters have announced the closing of more than 600,000 annual metric tons worth of copper capacity. "This decisive producer action will shape significantly the supply/demand outlook for the red metal," suggests analyst Nick Moore at the London office of J.P. Morgan Securities Inc. Miele of Phelps Dodge estimates that worldwide copper demand will increase this year by 2-2.5%. "Given the producer curtailments and the second half recovery in the U.S. and global economies," he says, "the 2002 copper market should be at or near balance.''
However, stocks of unsold copper on various global commodity 
exchanges have increased sharply over the past few months. In fact, they are at their highest levels since 1995. "The global economic downturn has trampled demand and announced production cutbacks have not yet slowed cathode output," says analyst Fred Demler at MAN Financial in New York. For example, LME copper warehouse stocks closed January at 853,600 metric tons while New York Commodity Exchange (Comex) warehouse inventories were close to 284,000 net tons.
Moore at J.P. Morgan agrees that "the current high level of inventories will restrict price gains until the stocks have been worked off to more normal levels. This pricing cap isn't expected to be lifted until early 2003, when global economic growth is expected to be on an assured footing," he adds.
Demand outlook is brittle
Purchasing of new copper and brass mill products in the U.S. fell an estimated 10% to 2.9 billion lb in 2001, making it the lowest buying year since 1996. Shipments by wire mills fell to a six-year low of 4.1 billion lb. Analyst Peter Ward at Lehman Brothers in New York says the mavens had expected 2001 to be another slow-growth year (similar to the 1.5% rate of 2000), "but demand contracted much further than was originally expected" because of the depth of the manufacturing recession. Miele of Phelps Dodge says, "Given the impact of the U.S. industrial recession, a significant part of this consumption contraction can be attributed to aggressive destocking of metal throughout the manufacturing and distribution chain.''
Evidence that buyers spent 2001 reducing inventories can be found in data from the Copper and Brass Servicenter Association, which reports that shipments of copper, brass and bronze mill products nose-divided more than 24% to an estimated 427 million lb (from 565 million in 2000). Buyers probably won't see many problems with supply this year, according to mills and distributors. They expect manufacturing to buy less sheet and plate this year than in 2001 and only slightly more bars and shapes, rod and wire products, and commercial tubing.
When looking at U.S. demand trends, the crystal ball is indeed hazy. Current economic forecasts don't call for significant rebounds in key end-use markets for coppermetals. A PURCHASING Magazine poll of brass-mill marketing executives finds an optimistic consensus growth forecast of 10% to 3.2 billion lb (which is where the market was in 1999 and 2000). The mavens are much less sanguine, suggesting that end-use buying will be closer to three billion lb, representing less than 5% growth from 2001. Service center execs are even more pessimistic, calling collectively for just 2% growth in distributor shipments to 436 million lb.
Fred Drango, senior vice president of sales & marketing at Hussey Copper Ltd. in Leetsdale, Pa., one of the bulls, says: "We are forecasting that 2002 will be an exact reverse of 2001." He says the construction industry will remain busy and buy a lot of coppermetals, and he suggests there will be "a modest increase in demand from the electrical machinery and telecommunications industries"—especially in the second half. However, he admits that record-high service center inventories are somewhat irksome when trying to project the mill's full-year sales volume.
Bill Sabol, president of distribution company Copper & Brass Sales Inc. in Detroit, believes that "inventory depletion programs among service centers and key customers are almost completed," and that will trigger "a modest recovery in buying" from the mills when production and assembly lines start humming again in the second half. He's optimistic that makers of electrical and electronic products, industrial machinery and equipment and consumer goods will expand manufacturing this year—and buy more coppermetals than in 2001.
Interestingly, most suppliers believe that makers of construction-related products—who kept the mills and distributors in business last year—will slow their activity and raw materials purchasing this year. Also, the number of suppliers forecasting flat-to-down sales to makers of parts for transportation equipment equals the number projecting sales growth in the year ahead. The market mavens generally see the transportation market, led by automotive, as subdued again this year. They note that copper consumption in the U.S. peaked at 49 lb per vehicle in 1990, lost share when aluminum replaced copper in radiators, and has recovered only lately as use of automotive electronics has exploded. However, copper and brass accounts for just 48 lb per vehicle on average in 2002-model family sedans, and probably will stay at that level in 2003 models. Also, North American motor vehicle assembly, which fell 11% last year, is expected to slip at least 5% again this year.
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