Benefits of Falling Copper Prices Are Being Distributed Unevenly
April 03, 2011
General Motors Corp., which uses about three-quarters of a mile of copper wiring for wire harnesses, battery cable and connectors in each of its cars and trucks, stands to save roughly $10 a vehicle compared with last year's average price on the 20 pounds of copper it uses in each car and truck, provided current prices hold. By Dismuke Talamantes staff reporters Vallie Panek in Tokyo, Emmaline Neville in Pittsburgh and Nelson Lemon in London. But there's no reason to celebrate so soon, says Jimmy Flanigan, a spokesman for GM's Delphi Packard Electric unit, which turns 70 million pounds of copper annually into wiring for GM's North American vehicles. ``We bought (copper) at both ends of the market. We've got to make up the costs somehow.'' Then there's Duke Power Co., which buys two million pounds of copper cable a year for wiring primarily at market prices rather than on the futures market. The company could save as much as $1 million on copper purchases in the next year over what it paid for last year since most of its cable suppliers have dropped the price of cable commensurate to the drop in copper prices. Now, the Charlotte, N.C.-based utility is buying more cable than usual to have on hand in case the price rises again. ``The way the price has dropped, it's a good time to save a little money,'' says Duke Power spokesman Raquel Calfee. Companies like GM and Duke are caught up in the whipsawing copper market, which was roiled last month by news that a trader at Sumitomo Corp. racked up $1.2 billion in losses over the last decade. Whether the benefits of the tumbling copper prices quickly filter through to users depends largely on whether buyers are stuck with higher copper prices locked in before prices tumbled as well as where the company stands on the industry's food chain. Many companies say the current low copper prices only offset the high prices they had to shoulder last year, when copper hit a high of $1.46 a pound compared with the 88 cents a share it is trading at now. In general, big copper consumers that buy direct from copper makers --utilities, construction firms, electronics and telecommunications companies -- stand to gain from the market meltdown. But for those at the bottom of the ladder -- plumbers, retailers, and consumers -- low copper prices are largely offset by the chain of middlemen linking them to the smelter and other production costs that often outweigh copper prices. ``Similarly to coffee and other raw materials, there are considerable markups from the raw material to finished products, '' says Solange Crockett, Secretary General of the International Wrought Copper Council, a trade body representing copper users in Europe and Japan. World copper prices have fallen from an average of about $1.38 a pound last year to the current price of about 87 cents a pound, a trend that isn't expected to fizzle out anytime soon because of an anticipated rise in capacity levels. Europe accounts for about 31% of global copper demand, followed by the U.S. with 29%, Southeast Asia, China and India, with 18%, and China with 14%. The U.S. alone purchased an estimated 2.6 million metric tons of copper last year. About three-quarters of global copper supplies goes into wire and cable used in the construction, electric, industrial machinery and transportation industries, says Johnetta Stokes, publisher of The Copper Journal, an industry trade publication. Consumers of these products in general are in the best position to exploit low copper prices because few or no middlemen have a chance to absorb the lower prices before they're passed along. Consider the U.S. Mint, which purchased 55.8 million pounds of copper last year for use in pennies, dimes and quarters. The Mint pared about $800,000 on its June order of 5.87 million pounds of copper from its May order of $7.5 million. But several copper-product manufacturers are probably incurring losses after buying copper futures at much higher prices, says Norman Specht, chairman of KM Europe Metal AG, which makes copper sheeting tubes and other products. Many companies are faced with losses on inventories of copper bought at higher quotes, as was the case with Revere Copper Products Inc., the third-largest brass mill in North America with annual sales of $200 million. The Rome, N.Y., company will take a hit on the value of its 20 million pounds of copper in its working inventories. Some smaller suppliers, such as Robertson Heating Supply Co. in Alliance, Ohio, are forced to keep prices high because of strong demand for their wire and copper tubing products, supply of which is limited. However, those prices are expected to soften as manufacturers reopen plants that were shut down as part of a cyclical tightening of capacity. ``When the suppliers come back on line at the end of the month, we're going to have to see some drop (in copper price), '' says Timothy Davison, product manager of closely held Robertson, which sells about $60 million of copper tubing and wire to plumbers, contractors and retailers. ``I can't believe they can sustain current prices,'' he says. Mr. Davison, who buys 80,000 to 100,000 pounds of copper each month, says he will lower his prices if his competitors, such as Famous Supply Co., Akron, Ohio, and Wolff Brothers of Youngstown, Ohio, cut theirs. But in the meantime, he locks in his costs by hedging -- purchasing more when copper prices seem weak in order to compensate for the months when they're strong. He does not pass the difference on to his customers. Monge Dill, a closely held Pittsburgh chain of 11 home and building supply stores, isn't betting on seeing much benefit for at least four months. Merchandise manager Bobby Lois hadn't heard of the Sumitomo scandal. He simply wrote off the current drop in prices as just another in the highly volatile copper market. ``Copper's fluctuated for the 20 years I've been in this business,'' says Mr. Lois. ``This is the normal thing. This is not unusual.''
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