Price rise will be modest

By Staff -- Purchasing, 2/8/2001

What's happening: 2000 was a good year for producers of copper and copper alloy mill products. Growth of sales to the information technology, coinage and manufacturing sectors underpinned overall solid demand growth and offset lackluster sales to construction-related sectors. In fact, the U.S. electrical, electronics and telecommunications economies boosted home-market consumption to the extent that slowing second-half manufacturing had little impact on 7% end-use growth of wire and brass mill products to 8.5 billion lb. And that's why Purchasing's composite price for a marketbasket of copper and copper alloy mill products rose 10% last year. Use of copper cathode, the basic raw material, rose by 5% worldwide and by 2%-3% in the U.S. Domestic mill-delivered cathode rose to an average 88¢/lb last year from a 1998-1999 average of 78¢. Since copper is a traded commodity, the London Metal Exchange (LME) cathode price is a key indicator. LME tags nose-dived to an average 73¢in 1998-1999 from $1.03/lb in 1997 when demand crashed in Asia and world stockpiles exploded by 44%. LME copper recovered to 82¢last year, which was well under the earlier consensus forecast of 90¢. That's probably because even though sales rose by 6%, producers continued relatively high smelting and refining rates and global stockpiles only slipped by 14%. As demand outpaced supply, stocks in LME warehouses reportedly were down by year's end to half their level at the beginning of the year. However, latest audited data shows the world's copper deficit for the first nine months of last year was 393,000 metric tons, but the global market began the year with a surplus of 1,332,000 million metric tons-in exchange and merchant warehouses-to work down.

Why it's happening: Although Asian economies have been using more copper than during the region's 1997-1999 financial crisis, sales growth hasn't yet brought use back to the high pre-crisis levels that made it the world's largest copper-consuming region. That hasn't been the case in the U.S., the second-largest copper-consuming area. Evidence: Copper and brass mill product sales by distributors literally exploded by 16% last year. Members of the Copper and Brass Servicenter Association shipped more than 570 million lb last year, the highest volume ever. Better-than-expected demand from the construction industry supported output and demand for brass rod from part makers last year, and offset poor sales performance for copper tube. While fourth-quarter orders for magnet wire slackened dramatically, full-year use was strong and the demand outlook remains solid. The best growth, however, was seen in the rolled-product markets last year. The IT revolution drove sustained demand for wire, cable, sheet and strip. Atop that, coinage programs for the euro and U.S. expanded demand for rolled products. Interestingly, North American market prices for cathode slipped in November and December as market fundamentals softened modestly. Shipments by brass and wire mills slipped as demand registered slower growth alongside the moderation in U.S. manufacturing activity. Meanwhile, fourth-quarter global production of copper accelerated.

What to expect: With the world market expected to be in new-supply deficit again this year, traded copper prices should move higher at least through the first half of 2001. However, most analysts reiterate earlier forecasts of LME copper averaging 83¢this year. PURCHASING sees domestic cathode at 92¢. A copper bull, analyst Dave Meger at Alaron Trading Corp. in Chicago, looks for copper to trade in an 84¢-90¢range in 2001. However, most other analyses are less bullish. That's because economic expansion in Asian countries should be solid as income growth and infrastructure requirements will boost copper use. But that won't be enough to hike cathode prices substantially. Reason: While long-term growth prospects of the U.S. and European economies are good, this year's demand trends will be slower than in 1999-2000.

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