Recent Copper Price Trend
On three occasions in 2007 (early May, July and early October) the LME copper price has gone above US$8,000 per tonne, before falling back to around US$7,000/t. During 2007 the price didn’t surpass the peak level of US$8,500 per tonne that was touched in May 2006. The copper price tumbled to a 9-month low of US$6,330/t in December 2007, but has been climbing again in January 2008, back to US$7,280/t. The lowest level reached in the last 18 months was in early 2007, when the price dropped below US$5,300/t. Even this “low” price is, of course, much higher than the price level that prevailed before copper prices began to rise steeply in 2005.
Strong Copper Demand Outside US
Despite the downturn in the US during 2007, as the fall in house construction activity reduced demand for building wire and copper semis, the price of copper held up. In 2007 weaker demand for copper in the US and in North East Asia has been outweighed by continuing growth elsewhere. Strong demand from China is the main factor, but other developing countries are also reasonably strong. Even in Western Europe demand has not so far been much affected by the slowdown in North America.
Q4 07 Looks Weaker
During late 2007 there were, however, some indications of weaker demand for copper in Europe. Even in China copper consumption in Q4 07 was significantly lower than in Q3 07, though some commentators suggest that the adverse trend will not continue in 2008. The main weak spots for refined copper demand have been in copper semis, rather than wire and cable markets. There has, for example, been a downturn in Chinese exports of air conditioners, due to the weaker housing market in the US, which has reduced Chinese demand for copper tube. These soft spots in demand account for the retreat of the copper price in late 2007.
Mining Industry Consolidates
On the supply side there are inevitable short-term swings in market sentiment, as a result of news from the copper mining industry relating to industrial disputes, production disruptions, etc. Overlying these day-to-day developments, during the last two years the consistently high level of metal prices has stimulated takeover activity in the global mining industry. The large metal mining groups typically have a wide portfolio of working mines and exploitable reserves. Although copper is an important element of these operations, other base metals (nickel, etc.) are also important, while the largest groups have very diverse interests that extend into mining of iron ore, bauxite, coal, etc. The most recent round of consolidation in the mining industry began in 2006, and since then there has been a series of deals that have involved many of the major players in the mining business.
Series of Deals in 2006 and 2007
In 2006 Xstrata bought Falconbridge, beating an offer from its rival Inco, a company that was itself at the time subject to a bid from Phelps Dodge. The Brazilian group CVRD subsequently bought Inco. Then, in November 2006, Freeport McMoRan reached agreement to buy Phelps Dodge, both these companies being major copper producers. Subsequently Freeport sold the wire & cable business, Phelps Dodge International, to General Cable. Phelps Dodge would have been the last major mining group to be integrated downstream into cable-making, except that, as a result of Rio Tinto’s takeover of Alcan in 2007, Rio Tinto now owns the Alcan cable business, as well as all its other aluminium interests. Most recently (November 2007) BHP Billiton has made a bid for Rio Tinto. The scale of this proposed merger is vast, with BHP Billiton identifying potential for US$3.7 billion per year in “quantified synergies”. There have also been reports that the Chinese steel-maker Baosteel is interested in bidding for Rio Tinto!
Aluminium Price Moves Up in Q4 07
The short-term spike in aluminium prices that occurred in June 2006 has not been repeated in 2007. During 2007 the trend in the aluminium price was generally downwards, though it moved up in November, at a time when the price of copper (and most other base metals) was falling quite sharply. But, as in most past periods, the volatility in the price of aluminium has been much lower than the volatility in the copper price. As we noted in the December 2006 review, there are some fundamental differences between the economics of the copper and aluminium industries that explain why supply constraints are generally less critical for aluminium than they are for copper.
Aluminium Producers Seek Lower Cost Operations
Most of the added value generated in production of refined aluminium arises in smelting, rather than extraction of bauxite / alumina. The raw material is abundant, and the main element of cost is electricity used in refining. The recent modest rise in the price of aluminium has been supported by the decline in the value of the US dollar and the rise in the oil price. Since energy is a major component of the costs of producing refined aluminium, increases in spot power rates drives up the marginal cost of aluminium smelters. Aluminium companies are now looking to develop smelter projects in Africa (including ones in the Congo, Algeria and Angola), where operating costs are lower.
China Discourages Metal Exports
Increased demand from the developing world, but China in particular, is the main fundamental factor that has underpinned high commodity prices over the last two years. As a result of its growing industrial production, China is a major importer of many scrap metals, including copper. Recent increases in theft of cables and other metallic items in various parts of the world are often attributed to the demand created by high levels of scrap purchases, especially by China. The authorities in China have played an active part in encouraging imports of key metals and discouraging exports from China. In an effort to ease potential shortages, the Chinese government imposed a 10% tariff on exports of copper products in 2006 and removed import tariffs on copper scrap. The Chinese authorities have been also discouraging exports of aluminium by imposing export tariffs. A 5% tariff on exports of aluminium ingots was applied in January 2006, and then raised to 15% in November 2006. As aluminium producers reacted by switching their exports into semis, a 15% tariff was applied to exports of aluminium rods, bars and sections in August 2007, while the 5% tariff on primary aluminium imports was suspended.
Other Metals: Zinc
Apart from being used for galvanising steel wire armour, the other main use for zinc in wire & cable is for galvanising steel wires used in overhead conductors. Though the price of zinc (averaging about US$3,500 per tonne in 2007) is lower than that of copper, it is high compared to the price of steel wire, so suppliers of steel wire may try to pass on price increases due to strong movements in the zinc price to their customers, including cable-makers. China is much the largest producer country of zinc, as well as being by far the largest consumer. While China in some recent months has been a net importer of zinc, it does not have the dominant effect that it has at times in the copper market, through drawing in imports of refined copper and copper scrap from many parts of the world.
Other Metals: Tin
Tin is only a minor element of metal consumption for cable production. Though tin is widely used for electroplating wires in some types of communication and LV energy cables, the amounts of tin deposited are small compared to the weight of copper used in the conductor. As with other metals, activity in China is a key driver of global demand for tin, and the country is not far from switching from being a net exporter of tin to a net importer. The other main countries producing refined tin are Indonesia, Peru, Malaysia and Thailand. The price of tin during 2007 has at times gone above US$15,000 per tonne, and during H2 07 the price has continued to climb, in contrast to most other base metals. From the cable-maker’s point-of-view tin is one of those materials for which cost increases may have to be absorbed in slimmer margins if they cannot be recovered in higher cable selling prices.
Oil Price at Record Levels
After the cost of the conductor, the other main element of cost in most cables is the cost of the polymeric material used for insulation and sheathing. The price of oil is a key driver of the price of polymeric materials, nearly all of which are derived from petrochemicals. Moving on a broadly parallel course to many of the base metals, the price of crude oil reached a peak in mid-2006, and then fell back. During 2007 the price of oil has increased once again, passing the previous peak price attained in 2006, and during December 2007 the price of Brent Crude oil came very close to US$100 per barrel. Polymer prices, especially polyethylene, also moved up in Q3 07, though the surge in polymer prices was not as marked as the sharp upwards rise in the oil price. The main reason for the high level of prices has been high demand, with the main growth areas being developing economies, though worries over possible supply shortages have also pushed oil prices higher.
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