The value of copper wire inventories throughout the country has been looking a little sad, of late, and there’s not much reason to think it will suddenly gain value anytime soon, based on the underlying copper content and the movement of copper prices in the market.
A month ago, on Feb. 7, copper was trading above 3.70 per pound. It closed this week, Wed. Mar. 6, at $3.49 per pound. Copper saw $3.91 last April and fell to a 52-week low of $3.29 last June. It hasn’t seen $4 since Sept. 2011.
Part of the reason is the expected entry of new supplies of copper onto the market as producers bring mines from development into production. Another part is a result of uncertainty about just how much copper is out there.
Copper analyst John Gross, publisher of The Copper Journal, sees the current market being in surplus even before new supplies come on line.
“I think the copper surplus is real and part of the problem with the statistics we have been working with is the lack of transparency from China,” Gross told Electrical Marketing. “Also, it seems to me that metal prices overall have remained high more because of Central Bankers quantitative easing rather than being due to the fundamentals.”
The lack of transparency forced copper analysts to make some guesses about the amount of copper in the inventory of the various warehouses around the world. It may be that they guessed low, and that the market was in balance last year when most estimates had it undersupplied, Gross adds.
“In 2012 the statistics showed a +/- 400,000 (metric ton) deficit for the global copper market. But as you know, we don’t have good consumption numbers from China, thus, I am inclined to think the overall market was in near balance last year as it is now assumed copper held in bonded warehouses is in the range of 1 million metric tons, rather than the 400,000 – 600,000 mt previously thought.”
Here’s Gross’ take on where the market may go next:
“The published exchange warehouse numbers show a steady build-up of inventories, which I think will continue to put downward pressure on prices. That said, there are some analysts such as Goldman Sachs who view this pullback as a buying opportunity. They think the concerns about China’s growth are overdone and that market will recover, thereby sending prices higher again.
“While that may be true, right now prices are and have been in decline. So until we see more evidence of a real pick up in China — and the rest of the world — as well as metal coming out of warehouse rather than going in, copper consumers should remain cautious and have plans in place to protect inventory valuations.”
Market response to price declines at the end of last year helped some wire manufacturers weather a slow-down in shipments without a significant hit to profits. Daniel Jones, CEO of Encore Wire, McKinney, Texas, in a recent earnings call to discuss the company’s Q4 2012 earnings (via seekingalpha.com), pointed out the importance of the spread between raw copper costs and price at which wire was sold for the company’s fortunes.
“The spread increased 6.4% in the fourth quarter of 2012 versus the third quarter of 2012. Our copper unit volume shipped in the fourth quarter of 2012 decreased 9.4% versus the third quarter of 2012,” Jones said. “The spread increase helped us to produce similar earnings in both of the last two quarters despite the volume decrease. Volumes in the fourth quarter are generally at their winter and holiday low point. Relatively small movements in the spread can affect our earnings per share, and were a positive influence on a sequential quarterly comparison. Conversely, spreads were down 17% in the fourth quarter of 2012 versus the fourth quarter of 2011, and down 9.4% on an annual basis in 2012 versus 2011.”
Diversification of product mix can blunt the impact of copper prices. Encore is putting new emphasis on its aluminum wire offerings.
“A new aluminum building wire plant began to produce wire in the fourth quarter. The last of the equipment is being delivered and installed in the first quarter of 2013,” Jones said in the conference call. “We’re expanding our distribution of aluminum wire to all of our sales reps and customers in the first quarter, and expect to see sales of these products to gradually increase over the course of 2013.”
GE Vernova
