What’s The Deal with Copper?

Part 1 in a 3 part series about copper and wire pricing (Part 2, Part 3).

Here are the 3 things you need to know:
  1. The Basics: where copper comes from and what it’s used for.
  2. Copper Markets – how do they work?
  3. Copper Prices – why are they constantly changing?

A Brief Primer

Copper is one of the oldest and most important metals in human civilization. It’s usage dates back at least 10,000 years and it’s use in making Bronze makes it the cornerstone of an entire period of human civilization (the Bronze Age). Today it’s used primarily in electronic devices and building wiring and piping.

Speaking of building wiring, copper is the main ingredient in almost every single one of our bulk wire products. This is true from both a weight standpoint as well as from a cost standpoint. It counts for anywhere from 40% to 70% of the raw weight of each of our bulk wire products. There are a few exceptions, mainly certain coaxial cables, but this is true for about 95% of our products.

Where does this stuff come from? Copper is mined throughout the world, but almost half of the world’s production comes from South America and most of that from Chile and Peru. The remaining half of worldwide copper production is spread pretty evenly among a bunch of countries you would recognize (the U.S., Australia, Canada, China, Russia and some others). The U.S. only produces about 7% of the worldwide total.

Bingham Canyon Mine

Bingham Canyon Mine, a copper mine located southwest of Salt Lake City, UT. This is the deepest open-pit mine in the word. To give you an idea of scale. See those little specs down in the bottom? Those are trucks the size of a house. Pretty cool, huh? Picture courtesy of Wikipedia.

An Exchange Traded Commodity

While South America might be the largest producer of copper, most of the world’s copper ends up in buildings and electronics in North America, Europe, and China. Those three geographic locations are all significant producers of copper, but they don’t produce nearly enough to meet their own needs.

So, how does copper get from a Chilean mine to construction sites and living rooms in North America, Europe, and China? Well…

Copper is an exchange traded commodity. All fine and dandy, you say, but what does that actually mean? It means that there are exchanges, or markets, where you can go to buy or sell copper.

If you’ve ever traded stocks, these exchanges work pretty much the same way as stock exchanges. There are buyers and sellers, each making offers to buy or sell copper at a certain price. If there are more buyers than sellers, the price is driven up. If there are more sellers than buyers, the price is pushed down.

So, to answer our earlier question: after copper is mined in Chile, it’s transported to copper exchanges throughout the world. From there, buyers take delivery of raw copper and ship it to factories for transformation into a multitude of products (in our case, wire). Let’s talk about some of these exchanges for a minute.

Copper Production by Country

Statistics courtesy of the U.S. Geological Survey copper report.

The Copper Exchanges

There are copper exchanges in all the major economic hubs throughout the world, but the ones that matter to us are the London Metal Exchange (LME), Comex, and to a lesser extent the Shanghai Metals Market (SMM). These three exchanges all follow each other pretty closely and there usually aren’t major price discrepancies. The primary difference between the three is in the markets they serve.

Comex, which is a sister company to the New York Mercantile Exchange (NYMEX), is based in New York and serves the American copper market, so it’s priced in US Dollars per pound (lb). Since American wire manufacturers buy all their copper through Comex, their pricing is usually based on a specific Comex price, ie. $3.43/lb.

ICE, and other companies who manufacture in China, usually base their pricing on LME, because we buy all our copper through the London Metal Exchange. LME is priced in US dollars per metric ton (a metric ton is equal to 1000 kilograms, or 2,204 pounds).

Wait a second, why are we buying copper from the London Metal Exchange if we manufacture in China? Well, LME is kind of like the world market for metals. All the other exchanges mostly just serve local markets, but LME has over 600 warehouses throughout the world.

LME is the market that matters most to us. When we talk to customers, we always use Comex pricing, because it’s easier to understand, since it’s priced in US Dollars per pound, but we think in terms of LME pricing.

That leaves one other copper exchange; the Shanghai Metals Market. Shanghai Metals Market (SMM) is priced in Renminbi (RMB) per metric ton. Renminbi is the currency of China, technically the People’s Republic of China.

The truth is, SMM isn’t all that important to us. For some reason, most of the wire factories located near Shanghai, which is in the Eastern part of China, produce coaxial cable, and the sad fact of the matter is most of the coaxial cable that goes into the residential market in the U.S. has hardly any copper in it; instead, it uses steel and aluminum for conductors and shielding.

As a result, most of the products we build in factories that take delivery of copper through SMM don’t have much copper in them, so we don’t pay much attention to the SMM copper price. If we had it our way, things would be totally different. All the coaxial cable going into the residential market would have loads of copper in it, because copper is a much better conductor than steel or aluminum, but not everybody’s as discriminating as we are.

Availability and Volatility

The main advantage to having a commodity traded on an exchange is Availability. On any given day, you can go to one of the copper exchanges and buy copper. If the big Chilean mine is experiencing production difficulties, you can just by copper from an Indonesian or Australian mine. Rarely do exchange traded commodities become simply unavailable to buy.

One of the few times in recent history that any exchange traded commodity has become simply unavailable was several years back when there were worldwide food shortages. Governments of poorer countries restricted their farmers from shipping rice and grain to buyers in richer countries who could afford to pay more for it than (poorer) local buyers.

That example beautifully illustrates why exchange traded commodities rarely become unavailable: because as a commodity becomes scarce, the price goes up. Thus, the commodity is still available, but at a higher price. And that gets us to the main drawback of exchange traded commodities: Price Volatility.

Price volatility has been the copper story in the past several years.

The Copper Price Story

We’ll start with a chart:

Copper Price Chart

This chart, which shows the price of copper in US Dollars per pound over the past 3 years, tells a pretty amazing story. Three years ago, copper was at about $4.00 per pound. Then, over a 6 month period, it lost about two thirds of it’s value (number 1 in the chart above). It’s worth stopping for a second to let that sit in.

In the span of six months, the market price for our products fell by about 40%. Of course, it would make our jobs too easy if prices stabilized, so they immediately started rising and have more than tripled in the last 2 years.

It hasn’t exactly been a steady rise, either. There have been some sudden, scary drops along the way. Witness number 2 in the chart above, where you can see that copper dropped 23% in a mere two months. When that happened, we were thinking, “Uh oh, here we go again.” Only to have copper start rising again!

What we’re trying to get across is that copper prices are volatile. Really volatile. They can easily move 1-3% in a single day.

To put that into perspective, when we give one of our factories the go ahead to start a production run, we have to order all the copper needed for that production run on the day we give the factory the green light. The price we pay for the copper is whatever price the LME market closed at the day before. So, the volatility in the copper market from day to day can easily mean a difference of several thousand dollars in production costs.

But Why?

Right about now, you might be wondering, “Why are copper prices so volatile?” That’s a really good question. If you figure that out, let us know…

We kid, we kid, but only a little. The huge drop in the chart above (number 1), coincides pretty nicely with the housing bust in the U.S. and the global economic slowdown. In theory, commodity prices should follow macro-economic events pretty closely.

This makes sense intuitively; more economic activity (buying goods or building stuff) equals higher demand for commodities, but the supply stays the same (because it’s hard to just go out and start new copper mines). Higher demand plus same supply should work out to higher prices.

In practice though, things haven’t quite worked out that way. For instance, why have copper price run up so high when we’ve only recently left the global recession behind? Sure, things are better now than they were two years ago, but they’re not great, and they’re certainly not as good as they were 4 or 5 years ago. So why is the price of copper higher now than it was in the midst of the boom times?

If we jump into a little Econ 101, one possible answer jumps out at us: reduced supply, in the form of production difficulties or labor disputes. If the demand for copper has stayed more or less the same in the past two years, but the supply has gone down, the price of copper should go up.

Production difficulties and labor disputes are common. We hear about strikes all the time at the big Chilean mines. There’s one problem with this theory though: the supply of copper has actually been increasing. Here’s a chart showing worldwide production over the past several years:

Wordwide Copper Production

Statistics courtesy of the U.S. Geological Survey copper report.

Speculation and Inflation

If you asked us, we’d say all this madness is due to some combination of speculation and inflation. If you speculate that inflation is likely, the last thing you want to do is leave your money sitting as cash, since it becomes worth less over time. Commodities, especially metals, are a classic hedge against inflation.

If speculation and inflation, or speculation about inflation, are indeed the culprits, you’d expect to see similar price movements amongst all commodities. And we have; other metals (aluminum, silver, gold, you name it) have all seen price gains similar to copper’s, as in tripling and doubling over the last two years. And surely you’ve noticed higher oil prices at the pump.

We’ll stop our speculation there though, because we don’t exactly have PhDs in Economics and even the people who do have PhDs in Economics only get this stuff right about half the time, and that’s guaranteed because half of them are saying one thing and the other half are saying the opposite.

Let’s just say that these are some strange times. How strange? Check out this screen shot of a Google News search for “copper speculation.”

Copper News Headlines

See that? Two articles from the exact same day saying the exact opposite thing. That’s the environment we’re operating in. Absolute madness!

We’ve come to the conclusion that price volatility is just going to be a fact of life for the foreseeable future. So, instead of focusing on price volatility, something we cannot control, we’ve focused our energy on making sure that our response to this volatility is systematic, rational, and predictable.

Part 2 Coming Next Week

Hopefully, you’ve gained some insight into how copper markets works and why prices are so volatile.

Next time we’re going to talk about how ICE, and the wire industry in general, respond to this volatility. In other words, how we go about setting prices. Here are 3 things you’ll learn:

  1. How price changes in the copper market affect bulk wire prices.
  2. Price volatility of American vs. overseas manufacturers (like ICE).
  3. How our price change methodology works.

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