The Wide Impact of Copper’s Rise

Years ago the U.S. economy was a driver of copper demand.  Unfortunately this has changed with the advent of China using in excess of 40-45% of worldwide copper demand, India increasing its usage, Brazil’s economy growing (they have the Olympics and the World Cup coming to Rio), let alone other emerging economies.  And with the U.S. economy slowly improving, demand is outstripping supply.

From a supply side, mines have consolidated and periodically there is work slowdowns / stoppages.  In the cases of consolidation, why increase capacity to decrease pressure on pricing?

The continuing recovery in the global manufacturing sector has further driven demand.

Additionally, as many know, a new way to invest in copper became available in the fall with the advent of ETFs (exchange traded funds, which are mutual funds that are traded on the stock exchange).  At least three of these have been launched, and all are physically backed by copper … another demand driver.

You may asked why should essentially a stock impact the price of copper?  The ETFs effectively increase the demand on copper.  More demand, same supply, higher price.  This becomes the impact of financial investments.

The November 26th issue of the Wall Street Journal, in an article talking about gold, had an interesting chart on the impact of the SPDR Gold ETF (see below).

• A number of contractors are upside down on projects that they have quoted.  In some instances, contractors are able to renegotiate with their GC’s/end-users; some are converting to aluminum, if they can; some are walking away from projects.  How can a distributor help?
• Some distributors are concerned about the increased credit risk that some contractors currently represent if they are upside down on a project.
• Contractors will need to learn to price projects differently, to have an escalator / de-escalator in contracts.
• The increase in the cost of copper further stresses a distributor’s cash flow, and possibly their credit line.
• Distributors, with copper pricing driving sales, may see exaggerated sales increases.  It will be important for distributors to consider units sold to guage their true performance.  And remember, distributors historically profit from higher copper prices.