A Note From The Copper Trenches

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We have written a lot over the last few weeks about the macro-economic situation the world’s metal markets find themselves in so it came as pleasure to connect with an old friend of ours Dan Kendall, President of ABC Metals to hear about life at the sharp end. ABC is a distributor of high quality precision slit non ferrous metal products with distribution centers in the mid-west and Texas.

Distributor inventory levels are at all time lows. Dan had a wonderful quote from the CEO of another distributor who said, “You could shoot a gun in our warehouse and not hit any metal”. Faced with falling demand and rising prices, distributors have stopped buying. Inventory levels are dramatically lower and only niche players with long running contracts and sophisticated cost hedges in place are managing to still grow their businesses. ABC was up 27% last year.

The mills are caught between rising metal costs and falling sales. Lead times are as short as one week at some mills. And if demand picks up, a good number of the mills will allow lead times to extend rather than bring idled capacity back online ” indicating they have no faith the market is going to turn around soon. Brass and copper scrap, the main feed for the brass mills, is in incredibly short supply and premiums are the highest they have ever been relative to copper cathode. With semis demand down there is not the new scrap being generated and old scrap has long since been cleared out during the last few years exported to China. Consequently the mills’ margins are under pressure and they can’t respond in the traditional way to falling demand by reducing prices. Speculative fund investments is pushing up the world price of primary copper when demand is sagging in the west. Imports into the US are way down, the weakness of the dollar makes foreign prices unattractive to US suppliers.

Interestingly exports have begun to re-appear for the first time in many years, fuelled by the weak dollar and appreciating overseas currencies like the Euro and Chinese RMB. US companies are finding overseas buyers switching back, attracted by suddenly competitive prices and reliable high quality.

The classic risk in situations of sustained high prices is product substitution. We have seen it happen dramatically over the last 18 months in stainless steel as buyers have shifted from high nickel 300 series to low or zero nickel 400 series ” with a resultant huge increase in chrome prices. This has been happening with the copper alloys and Dan quite perceptively calls this demand destruction rather than product substitution because many of these consumers never come back. Once they have geared up for a change in alloy or material there is rarely the financial incentive to switch back again. For example, plastic water tubing for copper in the plumbing industry is likely not going to result in a change back to copper.

Dan shared an interesting development in the copper market that could create significant long term growth opportunities. Simultaneous research projects have been funded in the US and UK into the antimicrobial properties of copper and its alloys. Research has shown that microbes exist for a matter of minutes on copper surfaces but can last for days or even weeks on stainless steel

Federal funding was released in August last year for research into the use of copper alloys in hospitals, catering and related applications where the spread of disease is at greater risk such as HVAC.

But even with these opportunities on the horizon it looks like there are tough times ahead for manufacturers, distributors and consumers in the copper industry. For once the whole market is in the same boat suffering from high costs and poor demand. And, with ever more investment funds speculatively flowing in daily to the futures markets there is no sign of an early end in sight.

–Stuart Burns

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