Hey Brother, Can You Spare Some Copper?

This morning, I'd like to welcome Aptium Global's Stuart Burns back to Spend Matters. With over twenty years of metals trading and arbitrage experience, Stuart is an expert in global direct materials sourcing, especially in metals categories. In full disclosure, I have an economic interest in his firm through my wife, Lisa Reisman, who is his business partner.

A colleague of mine passed on an insightful and largely overlooked piece of information the other day. Namely, that the value of the metal in a Nickel has surpassed its face value for the first time ever. 75% of a Nickel coin is made of Copper (yes, this does sound counter-intuitive). So when the price of copper exceeded $ 3.50/lb, Nickel was theoretically worth more melted down than as a coin.

Now, before you going breaking state law and launching a side smelting operation, let me say the reason I raise this point is merely to illustrate how much the price of Copper has increased over the last few years. No surprises here. I hear many a non ferrous metal buyer say, but for those not daily in the cut and thrust of the commodity markets, it deserves note that Copper has risen from a little over $1/lb in 2000 to $3.50/lb earlier this year—a 350% increase! Every year some investment expert somewhere has said the bubble will burst but the price has risen inexorably upwards. Why? Helped by some speculative fund support, true, but it's broadly down to supply and demand.

The supply is limited. Three of the largest suppliers of refined copper Chile, Zambia and Peru account for over 50% of the world’s production and in spite of considerable investment capacity, production increases have not kept pace with world demand. For the first time in some while, consumption exceeded production in the 1st quarter of 2007 and mines are operating at over 88% of capacity. Allowing for strikes which are frequent in South American mines, seasonal hazards and infrastructure problems the mines are running pretty much at capacity.

So where is the demand coming from? Well, it's not just China. Europe's consumption increased 8% year on year. India's rose even more and China? Oh yes. China increased 35% from 2006 to 2007.

In line with an easing in metal commodity prices everywhere Copper has come off its highs of the spring and is now trading at $3.25/lb. Not surprisingly predictions of where the market is going are all over the place. Bulls are predicting a return to $3.50/lb sighting continuing increases in demand by the developing four of China, India, Brazil and Russia. They point to the continuing tightness of supply and the decrease in LME stocks over the last 6 months.

The ICSG (International Copper Study Group) on the other hand is predicting the market will go back into over supply later this year and prices will fall to $2.73/lb late this year and $2.30/lb on average in 2008. Though LME stocks have fallen relentlessly, there is also an increasing amount of metal held off warrant, largely invisible to normal reporting, which could have a depressing effect on the market. In addition, new production is gradually being brought on stream. China has invested heavily in Zambia and is planning to spend some $900m over the next 4 years in addition to new mines in Tibet and elsewhere. Certainly suggesting China is taking the long view on this market securing supply sources for decades to come.

Where do we think it will be this time next year? We'll send a commemorative coin set to the person who nails the closest estimate (without going over). Your correspondent is placing his pin on $3.10/lb. Personally, I don't see this market going South big time. But let's hear it from our readers. We'll announce the winner in December. Send your "bids" by e-mail to the address below.

Stuart Burns is Managing Director for Aptium Global, Inc. Stuart works with small and middle market manufacturers to reduce direct materials costs and risks. He can be reached at sburns (@) aptiumglobal (dot) com.

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