Construction Forecasts

News & Analysis

Copper Price Surge Pauses

05/13/2008 by Jim Haughey, RCD Chief Economist

The recent economic news about copper is mixed, suggesting that the current high price is neither set to jump abruptly higher in the next few months nor fall significantly. Over $4.00/lbs in April, copper now sells in the $3.70-3.80/lbs range and is expected to stay in the $3.50-4.00/lbs range into the fall. This price level is not fully incorporated yet in prices for wire, pipe and fixtures.

Copper prices retreated from over $4.00/lbs on news that several mine strikes in Chile are ending. But strikes are now likely soon at several large mines in Peru. And world copper stocks remain dangerously low, although inventory is no longer declining rapidly. This pause in the copper price surge results partly from the slowdown in demand growth in the US and other developing countries that began late last year and is expected to persist until late this year. The outlook for copper and other commodity prices is grim when US, Canadian and European demand begins to expand quicker at the end of 2008.

The price surge for copper ore and scrap, 140% in the last three years, illustrates the new pricing and supply environment for metal, petrochemical and cement based construction materials manufactured from commodities whose prices are set in world markets.

Like other metal ores and energy, most of the worlds’ copper supply comes from developing countries where it is the dominant source of export earnings, national wealth and high paying jobs. Many of the mines and processing facilities are owned by the government or substantially controlled by government ministers or trade unions. As a result, politics is as important as economics in the copper market.

Countries with copper or other mineral assets use them, as OPEC does, to both express national sovereignty and claim a larger share of their products value from their developed country customers. Developed countries have made this easier to do. We have accepted the shift of mineral ownership from private US and European countries to government owned or sponsored domestic companies. Having done this, we had to accept the shift from long-term fixed price contracts to auction pricing. The transfer of market power from consuming to supplying countries was hastened by the exhaustion of low cost mineral supplies in consuming countries and the reluctance to mine new supplies for environmental reasons.

The result is that the price and supply of much of the material used in construction projects is subject to the political whims of small foreign countries and the current world demand-supply balance. This makes price and availability dependent on political and economic events outside the US as well as the exchange value of the $US. Contrast this with the “old” supply model for copper and other commodities. Imports influenced but did not dominate the price. Imports were largely controlled by US or European countries and were priced with long-term fixed price contracts in $US so currency variation had no immediate impact.

The iron ore market provides a preview of what may be coming. Brazil is demanding and getting more than a 60% rise in prices in mid — 2008. Australia reportedly has talked Chinese ore buyers into an even larger price increase.

Why are supplies so tight? Credit soaring infrastructure development in Asia, higher production and transportation cost due to fuel price increases and restraints on production from mismanagement by socialist governments that rely on plans rather than open access to private investors. For example, copper production is being lost in Latin America and Africa due to the unavailability of electric power. The government plans did not provide enough money for generating fuel or generating capacity. Also, oil production is now declining in many countries because the oil fields have been used as a cash cow to feed social programs or provide jobs to the politically correct people.


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