Low-priced red metalswill be readily available
U.S. demand for copper automotive electronics wire and magnetic wire is bolstering output of copper rod.; The trade deficit for brass mill products was estimated at 305 million lb, up from 278 million lb in 1997. However, the total copper trade deficit was only 161 million lb because of a healthy surplus wire mill and copper powder trade. The Copper and Brass Fabricators Council says nafta nations of Canada and Mexico are the leading importers and leading destinations of exports. Germany is the third-larges
By Tom Stundza -- Purchasing, 3/11/1999
Buyers should see abundant supplies of low-priced copper and alloys this year. The North American market will see slow demand growth and may be a bit disrupted by mergers, acquisitions, and other supply chain adjustments, as mills and distributors try to cope with another year of reduced margins.But North America will be calm compared to the havoc being wreaked in other global regions. Economic crisis in Asia has pulled Japan, Russia, Brazil, and other Latin American nations down, and now even is threatening European countries. So Wall Street analysts are warning copper industry insiders to temper any 1999 optimism. Inventories of copper cathode are at levels not seen since the late 1970s, with prices at the lowest levels in more than a decade.
World copper consumption grew by 2.3% in 1998, down from 5.3% the year before. "It's too early to predict that worldwide copper demand will be down in 1999," notes analyst Frederick Demler at metals brokerage ED&F Man, "but, at best, it won't be much stronger than last year." The mavens foresee neither a surge in global cathode demand nor significant cutbacks in production that will dissipate existing oversupply. "Global demand is slowing at the same time that global supply is accelerating," says analyst Richard Aldrich at Lehman Brothers.
Some bullish copper forecasters see 1999 world consumption growth at 3%, but even they suggest production growth will be stronger at 7%. That would offset any older-capacity cutbacks and normal production disruptions and maintain the price-depressing surplus. Reason: Supply expansions in 1998 pushed the global inventory-to-consumption ratio to five weeks of supply at year's end. That's double the availability at year-end 1996, just before the collapse of Asia's tiger economies.
Bloomsbury Minerals Economics points out that red metal is accumulating in warehouses because demand growth is unexciting and producers continue to pump out product. Even at current depressed prices (London Metal Exchange spot copper is close to 11 1/2-year lows), some miners are maintaining output. Cathode began to slide in 1997, then collapsed by 26% last year to 79¢/lb.
In the U.S., this resulted in a 19% decline in 1998 prices for copper and copper-alloy mill products. "Current weak prices simply reflect the world's supply-over-demand imbalance," says Demler, who doesn't foresee any meaningful price recovery until sometime in 2000. He and other mavens are forecasting U.S. cathode's annual average price for 1999 at around 65¢ to 70¢.
As a result, sales tags for mill products likely will drop further this year. How much is unclear, as it will depend on the price of cathode. However, some analysts project cathode trading as low 55¢ or 60¢/lb during the course of the year, and some industry insiders are even more pessimistic. Service-center exec Stephen Buzash, Jr., president of Standard Metals, Hartford, Conn., says he is gearing business for a year in which cathode could trade as low as 50¢/lb.
U.S. demand growth slows
The annual average demand for copper, brass, and bronze mill products in the U.S. has grown at better than 5% over the past seven years. Strong growth from the transportation, building construction, and electrical and electronic markets brought use last year in excess of 4 billion lb. However, the annual growth rate has been slowing in the past two years (last year it was 3.4%) and is projected to drop 2.2% this year to 4.17 billion lb.
And don't forget about wire products, which accounted for another 3.8 billion lb of consumption last year. Use, however, was flat in 1997 and could slip this year if construction slows as economists predict. That's because building wire is the largest wire-use segment. What is helping prop wire mill business is automotive electronics wire and magnet wire, which is the fastest-growing product line. Magnet wire is used in automotive, in-plant equipment, appliances, power utilities, lighting, and air conditioning and refrigeration applications. The CDA says energy-efficiency initiatives by the U.S. government and favorable copper prices have helped to propel the growth of copper magnet wire.
The lack of demand from the Pacific Rim and Eastern European and Latin American nations for machinery and computer equipment, especially, has been felt lately in reduced monthly shipments by mills and service centers who supply the metalworking industry. Still, says Demler, "although some markets are beginning to show some softening in demand for their goods because of the effects of the various financial and economic crises worldwide, the major U.S. market drivers for copper and its alloys point toward continued, if slower, demand growth."
The Asian economic turmoil has weakened the semiconductor market and eroded an important end use for copper and alloy connectors, notes Norman Wheeler, Jr., VP/sales at Outokumpu America Brass in Buffalo, N.Y. On the other hand, he says such electrical components as cord sets, plugs, and sockets used in the domestic construction are doing well. A portion of the industrial equipment market that services offshore construction projects has been hurt directly by Asia's problems, adds Don Commerford, senior VP of Revere Copper Products in Rome, N.Y. Joe Sara, marketing manager for PMX Industries in Cedar Rapids, Iowa, says there has been a demand softening in the connector segment of the telecommunication, electronics, and automotive industries.
Most brass mill execs remain optimistic about continued strength in the domestic market and are projecting modest sales increases this year. These marketers admit that offshore recessions and currency devaluations have put pressure on margins and shrunk the global market for mill products, but the still-growing domestic economy is keeping their outlook bright. However, they are increasingly concerned about the level of imports entering the country. Brass rod mill execs, especially, are feeling the effects of the Asian economic crisis from increased imports from that area and orders lost because of the slowdown in business activity throughout the Pacific Rim.
Demler says "there has been a definite surge in the East-to-West trade imbalance since 1996'' that accelerated in 1998. Reason: Metals demand in Asia is down by an average 65% from the middle of this decade. The overall copper trade deficit last year was an estimated 161 million lb because of a healthy surplus wire mill and copper powder trade. However, the trade deficit for brass mill products was estimated at 305 million lb, compared with 278 million lb in 1997 and 219 million lb in 1996. With offshore demand for brass and wire mill products weaker than in past years, the market analysts reckon it's probable the U.S. will continue to see healthy offerings of low-priced mill products from offshore throughout 1999 as well.
Some product lines have been hit harder than others. "Asian imports of tube have increased dramatically," complains Henry Schweich, president of Cerro Copper Tube in Shelbina, Mo., a producer of commercial tube, and Cerro Copper Products in Sauget, Ill., a maker of plumbing tube. He says that producers, fabricators, and distributors all report "a growing Asian presence in supply" of a market segment that has been very healthy because of robust building and construction activity.
In fact, imports have been so high for commercial tube used for air conditioners and refrigeration that the Copper and Brass Fabricators Council is considering anti-import trade actions against mills in Japan and Malaysia. Other possible target nations are France and Mexico. Joseph L. Mayer, president of the trade group, says there are two major brass mill categories that don't have existing dumping duties in force from the U.S. International Trade Commission. Makers of sheet and rod products in 11 foreign countries already have to pay dumping duties imposed earlier.
Some market analyses universally note that coppermetals consumers "aren't well stocked," and suggest that even slow metalworking growth will push them to expand purchasing. These analyses also suggest that the "millennium bug" also could lead copper users to secure additional inventory later this year in anticipation of logistical disruptions in early 2000.
However, domestic market observers believe that users have adopted strict just-in-time delivery and manufacturing systems to purposely keep in-plant stocks low. ("Also, a market surplus, irrespective of size, allows customers to operate hand-to-mouth with little impetus to bid up prices," says analyst Tom McNamara at cibc Oppenheimer.)
More important, say brass mill execs, is the fact that buyers are demanding improved mill product quality, expanded value-added processing, and increased after-sales service. Tighter purchasing specifications this past decade have caused the brass mills to invest substantial capital to improve mill product quality and provide more customer support, says Glade Nelson, VP/sales for NGK Metals in Reading, Pa. He points out that investments in plants and equipment to simultaneously upgrade products and cut costs "have become a priority for survival" because of global competition.
Copper isn't so invisible
Interestingly, the underlying strength of the U.S. economy boosted total local demand for all types of the red metal by 3% last year. Yet, some market insiders agree with Dave Cavanaugh, president of the U.S. Brass and Copper service center in Downers Grove, Ill., who says that "copper is the forgotten metal." He gripes that "the coppermetals are essential to this economy, yet they are almost invisible when compared with the metal market's knowledge about steel and aluminum."
In fact, U.S. demand for copper of all types (including scrap) has grown from 6.7 billion lb in 1990 to more than 8.5 billion lb in 1998, for a compound annual growth rate of 3.8%. However, copper may be perceived as an invisible metal because "there are a multitude of markets that consume copper-based products," explains Emil Milker, market research manager for the Copper Development Association. "However, there are some key end-use markets that use a lot of the metal," he says, citing transportation, construction, electrical and electronic, consumer and commercial products, and industrial machinery and equipment."
Transportation, in fact, is the fastest-growing market for copper; it has grown from 769 million lb in 1990 to more than one billion lb and about 12% of demand. Coppermetals are used in automobiles, trucks and buses, railroad equipment, aircraft and aerospace vehicles, and marine products. The automobile market accounts for 90% of the copper consumed, so use of red and yellow metals has increased from both the higher volume of motor vehicles being produced and the larger number of per-vehicle electrical applications in both automobiles, light trucks, minivans, and sports-utility vehicles.
The CDA says electrical applications have increased their share of the metal content of copper products from 64% in 1986 to 76% in 1997. The average car had 48 lb of copper and copper alloy products in 1986, while light trucks had only 38 lb. As light trucks have increased in popularity, so has their number of electrical features. "It is not unusual today for vans and SUV's to have power seats, power windows, power locks, intermittent wipers, anti-theft devices, and keyless remote entry," says Milker. "This increase in electrical features has enabled light trucks to catch up with cars in terms of copper consumed and both now have approximately 56 lb of copper products."
While the transportation market is the fastest growing, the building market is the largest consumer of copper products, at about 3.6 billion lb last year, or 42% of the total market. CDA says construction is composed of building wiring, plumbing and heating, air conditioning and refrigeration, builders' hardware, and architectural products. Residential construction has been setting records; in fact, new-housing starts were the highest in 11 years in 1998. And the strong economy has reduced nonresidential vacancy rates and has stimulated demand for new offices, commercial sites, and manufacturing plants.
Electrical and electronic applications are the second-largest market for copper products, accounting for 25% of the total market and about 2.1 billion lb of the metal. The four key end-use segments are: power utilities, business electronics, telecommunication, and lighting and wiring devices. The driver for coppermetals in power utilities is electrical distribution and control, which includes transformers, switchgear, industrial circuit breakers, and industrial controls. Electrical distribution and control, in turn, is driven by residential and nonresidential construction. These segments require copper-bearing molded-case circuit breakers, general-purpose relays, and fuse and fuse equipment.
Besides the recent high rate of new-building construction, Milker says that copper use is growing because "recent trends show building codes and local requirements for residences are requiring more circuits." Electronic-grade copper metals use has been rising from the strong production of personal computers and servers of all sizes, and the premises (or network) wiring used to interconnect groups of computers in buildings. Telecommunication-grade coppermetal demand has been bolstered by the popularity of facsimile machines and the Internet.
The use of copper in consumer and general products has grown for the past five years to more than 900 million lb, and about 11% of demand. These end uses are appliances, household products, consumer electronics, ordnance, musical instruments, toys, medallions and coinage, fasteners and closures, and utensils and cutlery. Demand for coppermetals also has shown healthy growth from the makers of plant machinery and other equipment, especially automated manufacturing, materials management, and shipping systems. Demand from equipment makers last year was about 850 million lb or 10% of demand. Major home-appliance manufacturers and machine tool builders, especially, have been expanding production annually for some time, and have bolstered the rise in demand for coppermetals from these two sectors.
Market at a glance
Demand is slowing. Use of coppermetals from brass mills, wire mills, and foundries grew by just 1.4% last year after growth of 3.7% in 1997. Look for 1.1% growth rate this year. Still, that will bring apparent consumption to a record 8.15 billion lb.
Supply is growing. Global cathode capacity is expanding and a surplus is expected to overhang the market for months to come. For processed products, the brass and wire mill product imports have been increasing, providing buyers with plenty of metal.
Prices are collapsing. Producer price index for primary copper crashed by 26% last year, while the PPI for mill products skidded by 13%. Purchasing's index of coppermetals fell 17%. With cathode forecast to drop another 13% this year, mill products look to slide another 8%.
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