These bandits aren't the only ones taking a risk. Anyone involved in the purchase or sale of copper can attest to the red metal's unpredictable nature.
According to a study published by John Bergtheil, global metal strategist for JPMorgan, copper warehouses may have a bit of room to spare. The report lists copper as the base metal with the lowest inventory levels. With current prices spiking off the charts and no hard and fast way to predict future value, smart management of in-stock material is critical.
Dan Kendall, president of ABC Metals Inc., Logansport, Ind., is acutely aware of the situation. The copper and brass service center has customers throughout the United States, as well as overseas, all of whom rely heavily on ABC and the products it keeps on hand. "We've been aggressively managing our quantities so as to mitigate the overall expense of the copper run-on to the best of our ability," says Kendall. "So we have some very aggressive efforts and disciplines put in place to effectively manage our inventory."
The approach that ABC takes with purchasing is much different than in past cycles when prices weren't as inflated. "It used to be like you were shopping at Sam's Club," says Kendall. "But now you can buy smaller quantities and rationalize paying a little bit more so that you can keep your cash consumption down."
Skokie, Ill.-based Guardian Metals Sales Inc. is taking a similar approach. "We're trying not to buy it to stay in inventory," says Bill Bohnen, company president. "So we're buying smaller amounts more frequently, as our customers are. We're not out of inventory though, we're just trying to establish that we turn it rapidly. We give the mill an order to produce 40,000 pounds, and then we say that we want 10,000 pounds every week of the month. That way they get their efficiencies and we get our efficiencies. If they want to make 10,000 per week, they can do it. If they want to produce 40,000 and they want to send us 10 at a crack, then they can do that too."
Bohnen realizes, however, that it is not as easy as he makes it out to be. "Somebody in lean manufacturing has to hold the inventory somewhere along the line," he says. "You can be as lean as you want, but if I glitch and I don't get it in on time, then they don't get it out on time. Somebody is holding stock somewhere for somebody."
To further compound the difficulties of managing inventories, service centers have to be aware of market segments experiencing differing success. According to a survey of distributor companies by the Copper & Brass Servicenter Association released on July 7, defense, screw machine houses and electric/electronics are in an upswing, while respondents expect automotive and construction to show decline. The activity of such market areas can affect how and when materials will move out of stock and into customer hands.
Contributing factors
During the summer months copper surpassed the $4-per-pound mark multiple times, frustrating buyers, especially those that realize the costs involved to smelt the red metal. Mines incur less than $1 per pound to turn the raw material into a usable substance, so current prices are seemingly inexplicable.
Compared to years past, prices have been soaring, contributing to the instability in the marketplace. Market fluctuations are keeping buyers on their toes. One day prices are up and the next they can be down by as much as 10 percent. The factors that create the ups and downs are numerous and, at times, unfounded.
The fear of inadequate supply is a major contributor. Brash responses to delays in industry production have been known to dictate the price of copper.
"If [those involved] read about a strike in Chile or if they read about a mudslide or a landslide at a mine, there's this perception that since the global consumption is barely being met that any supply interruption is going to cause a shortage and cause a profound ripple effect," says Kendall. "It just seems that the market is so sensitive to news about a shortage, it almost makes us vulnerable to manipulation."
In reality, however, the chance of a shortage is highly unlikely. Bergtheil's report cited Tom Albanese, CEO, Copper and Exploration of Rio Tinto, a worldwide metal producer. "All the metals needed for industrial growth, including copper, are abundant in nature and are unlikely to fall short of human demands," he said.
From a mill's perspective, Al Barbour, president of Concast Metal Products Co., Mars, Pa., believes that as a consumer of copper, as opposed to a distributor, two factors were weighing heavily on pricing: a good economy in the United States, coupled with the industrialization and consumption levels of China and India.
"This kicked off at the beginning of the year when we were just trying to find raw material," Barbour says. "It was just a supply and demand issue. It was coming from our suppliers not being able to get material because they were brokering it to China or India."
When looking for others to blame for erratic pricing, fingers can be pointed at investors that are dumping huge amounts of money into hedge funds. "There's speculation in the market," says Bohnen. "There are some hedge funds in the market that are putting money in hoping for the upside, and that's what drives it up. There's probably $1 of hedge fund money in [the current price].
"But these guys aren't in it for the long run," he continues. "They're not in it to take possession of a produced product. They're in it for minor fluctuations and then they're going to get right back out again as soon as they make their money or as soon as they make a return on their investment. They'll never take possession of the metal. That's not their position."
Cloudy forecasts
Because of outside factors, which are often unpredictable, the price of copper in the upcoming months is hard to pin down. In order to look at the long term, the menacing short-term contributors must be set aside. Bergthiel's report says that, "In order to step back from that daily noise one has to get a fix on what a realistic price is for copper in the medium term based on historical price versus inventory relationships and also based on historical price versus industry cost relationships." As mentioned previously, the cost to produce the material is a fraction of its current price, and coupled with past pricing trends, it is reasonable to believe that prices are bound to decrease.
"When the market readjusts, it'll be just as irrational and disorderly in its drop," says Kendall. The effect of a sudden but permanent dip could put companies in a difficult situation. So Kendall is readying his operations.
"Copper could easily drop back to $2.50, and that would really send some ripples through the market," says Kendall. "I personally think that when the decline happens there will have been somewhat of an economic pause. People that are holding copper either in their inventory or people holding copper futures or options would definitely feel that effect."
The ideal decline in copper prices would be a gradual one, but for those in the industry, steady pricing is a dicey prospect to count on. "If the price drops a penny per week for the next 52 weeks, people can manage that," Kendall says. "But if it drops 52 cents tomorrow and say there's a Delphi strike, it causes people to not want the copper that we sell to them, and then all those holding unprotected inventories would take a big loss."
On the flip side of that coin--which in the case of the penny costs more than its worth to produce--some in the industry don't project much of a decline in prices.
"Historically I think that copper was undervalued for a long period of time," says Barbour. "We really didn't realize what it was worth relative to other commodities. As long as business is strong in this country, we'll remain in this new level of pricing, certainly above $2.50 or $3 per pound. The longer it goes, the more accepting people become."
In the meantime, however, establishing healthy relationships with customers can alleviate some of the stress that comes with ambiguity.
"We price everything on day of order," says Barbour. "We're working closer with our customers because of this, so we're probably having more contact with them because we just can't predict that the price is good for even the next five days or so. When you get into this kind of pricing level, you definitely look at how you're pricing everything very carefully."
Tight bonds and progressive strategies will undeniably improve business regardless of what may happen to the price of copper. "There are some vehicles that we can use, and I say that figuratively," says Kendall. "We can do some firming of prices for these customers. But they become very much partners with us then. Because when we do that, it's not just ABC that has skin in the game, they do too. But when we align ourselves like that, we add strength vertically to the supply chain and we can do a lot of good for our customers there." MM
By Abbe Miller, from the August 2006 issue of Modern Metals.
