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The Law of Supply and Demand - Copper

The other day, I overheard a contractor at a gas station. The clerk inquired if he was going to fill up the tank in his truck and the contractor replied, "Nope, I've only got a hundred bucks on me." Gas prices soared so quickly that many contractors ended up paying the extra cost to do jobs out of their own pockets. There are many other shocking examples of unexpected cost increases spiraling upward after the job has been negotiated and the deal signed. The price of copper is going up.

There are many pitfalls for contractors. They need to practice self-defense. Unexpected costs can sneak up and wipe out the profit from a project. Some of the surprises cannot be prevented, but most of the nasty developments can be avoided. Planning is crucial. The agreement for a project should be well defined, with clauses to address unforeseen and unexpected expenses.

The drivers on the climbing copper prices
In 2011, market demand for copper is still rising strongly on the back of phenomenal growth in China, India and other emerging market economies. In China, the growth has been a staggering 15 percent per year. Stockpiles of copper have been in sharp decline the last few years. It is this scarcity that has driven prices higher while commodities traders out-bid each other as they scramble for available supplies and hedge on futures. Supply has fallen behind the growth of demand and prices can move in only one direction when this happens.

Economics is based upon the law of supply and demand (i.e., the study of the allocation of scarce resources). According to a study from geologists at Yale University, new discoveries of copper have raised global reserves by just 0.63 percent per year since 1925 but usage (final demand) has risen at 3.3 percent per year. No changes in this disparity are expected in the next few years.

Most copper ore is mined or extracted as copper sulfides from large open pit mines in copper porphyry deposits that contain 0.4 percent to 1.0 percent copper. Over 40 percent of the world’s copper supply comes from North and South America; 31 percent from Asia, and 21 percent from Europe. Chile is the world’s largest supplier of copper (it provided 35 percent of the total with Indonesia and the United States each contributing 8 percent).

Copper prices are at an all-time high. This base metal is experiencing a worldwide and unprecedented growth in demand that is driving the prices ever higher. The supply volume (mining and recycling) is stable at this time. With the long-term forecasts of increasing demand (particularly in China), we may see copper-based wire and cable products increasing in price over at least the next five years.

Copper uses growing rapidly
Nearly 50 percent of the demand for copper comes from the construction industry and 17 percent from the electrical sector. Copper is also used extensively in heavy and light engineering and in transport industries. From copper wire and communication cabling to copper plumbing and from the use of copper in integrated circuits to its value as a corrosive resistant material in shipbuilding and as a component of coins and cutlery, copper has a huge array of possible industrial uses.

An excellent example of the growing demand for copper comes from the automobile industry. The average new car contains 60.72 pounds of copper. Hybrid cars, which incorporate electric motors in conjunction with combustion engines, could lead to further rises in copper demand by this segment. A typical electric hybrid car might use around two times the current usage of copper in extra cabling and windings for electric motors. The improved technology of batteries and the soaring cost of gasoline have combined to give totally electric vehicles huge momentum in the marketplace. The numerous growing demands for copper have grown much faster than the supply.

The low flexibility of prices (based on demand) for copper usually stems from a lack of close substitutes in the market. For some products and processes, aluminum or plastic may act as a substitute to copper, but there are costs and delays involved in switching between materials.

The flexibility in the supply of copper is low. Supply is usually unresponsive to price movements in the short term because of the high fixed costs of developing new extraction processes and plants, which typically involve lengthy lead-times. Due to that pressure, investors seem resistant to investing in new copper mining facilities at this time. If existing copper mining businesses are working close to their current capacity, then a rise in world demand will simply lead to a reduction in available stocks. Current copper supply and demand issues may not bring the market back into equilibrium for many years. These price predictions do not even take into account the volatile effect of speculative buying.

The demand for copper will continue to remain strong provided that the global industrial sectors continue to expand production, but if prices remain high, we can expect to see some shifts occurring.

For a start, copper can be recycled, although the costs of doing so are often high. Recycling of wire and cable adds to the supply and is a major source of revenue for the astute contractor. However, the resultant byproducts of the recycling process include the release of toxic gasses in atmospheric emissions from the recycling plants and waste products (including heavy metals and other hazardous substances) dumped into rivers or ground water supplies. Most copper recycling materials, such as wire and cable, are associated with plastics, such as jacketing and insulation materials. Regardless, the price theory would predict an increase in demand for scrapped copper and perhaps a substitution moving away from copper toward aluminum. And in the interim, high prices and emerging new technologies may cause an even bigger shift in demand away from copper-based products.

Voice/data/video market
In the growing information technology market currently dominated by the copper cabling industry, the take off in wireless technology and fiber optics will also have an impact. The need for speed in transmission properties has placed a much higher demand for fiber optic cabling to replace copper communications cable. The cost comparisons are showing the two design choices are close to price parity; however, the fiber optic technology offers a significantly greater barrier to obsolescence. Recent interviews with various major U.S. cabling manufacturers and distributors (e.g., CSC, Accu-Tech and Graybar) confirmed cabling costs have risen in the last few months because of increased copper and plastics (FEP) costs. The argument in favor of investing in fiber optic cabling is compelling.

Higher prices may be the trigger to an expansion of copper ore production as supply responds to the incentives of increased potential revenues and profits. In recent years, copper mining production has fallen short of expectations. The rule remains: if the price stays high enough, suppliers will eventually respond and expand to the demand, or purchasers will find other products and solutions. Many experts feel this is not a temporary condition.

Competition demands that contractors must ensure the prices in their bids reflect the current costs of the products from distribution. Increasingly, we are hearing leading distributors warning the market about price increases that are coming because of soaring raw material costs. The copper and petro-chemical materials have had three sets of price increases in the last three months, and there seems to be more coming down the road. Currently, copper and FEP (Teflon) cable costs are soaring. Under the current conditions, the supplier or distributor should provide a written statement accompanying their bid to the contractor that will state the price is good until a specified date. Contractors may also build an escalation clause into their bids. Bids should have some protection against the cost increases.

BISBEE is with Communication Planning Corp., a telecom and datacom design/build firm. He provides a free monthly summary of industry news on www.wireville.com.

About the Author

Frank Bisbee

Freelance Writer

Frank Bisbee is with Communication Planning Corp., a telecom and datacom design/build firm. He provides a free monthly summary of industry news on www.wireville.com.

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