How has the price of copper impacted those in the industry?
The cost of copper has undergone substantial changes over the past few years. The raw material price fell dramatically at the start of the economic crisis, before rising to a record high in November 2010.
With the material being an essential ingredient of many products used in construction industry projects, it has had inevitable knock-on impacts. But just how strong have these effects been and how are firms preparing for any further changes?
One of the biggest issues with the changing price has been the erratic nature by which it has occurred. “Prices of commodities/ raw materials always fluctuate.
The key factor is whether the general trend is predictable and/or reasonable,” reasons Al Habtoor – Specon Managing Director Thrasos Thrasyvoulou. “From the start of 2009 there’s been a gradual upward trend, but on a day-to-day basis [the price] still moves up and down substantially; it can move by a couple of hundred pounds in a day,” reports Graeme Aittis, general manager AEI Cables.
The rise in prices during 2010 has been substantial and, to a large extent, unexpected. “Current prices are much higher than were expected by most analysts,” explains Ducab managing director Andrew Shaw.
On 4 January, the London Metal Exchange listed the copper selling price as US $7463/tonne, by mid-November the price listed was $8483 and there have been many changes in the days and months inbetween, with a record high hit on November 9.
“[The price of] copper has been very unstable this year,” confirms Darren Harper, engineering and business development manager, Prime Electrical Manufacturing and APEX Wiring Solutions. “It started at a high fairly US $6,900/tonne this time last year, peaked and troughed between 6,000 and 8,000 $/tonne for the first two quarters of 2010 and has been on a rampant vertical climb ever since.”
Compared to the last five to ten years, both the changes and the actual copper prices being seen are significantly different. “[The price] is at an all-time high,” stresses Aittis.
“During the last five years it’s been as low as GBP 1,900 at the end of 2008 when the economic crash brought the price down, but from the start of 2009 its been gradually rising,” he reports.
“Prior to 2003, we were used to low copper prices, below the US $2,500/tonne level. With the construction boom between 2003 to 2007, this naturally increased to around the US $9000/ tonne level, but this was predicted and priced in the increasing costs of executing projects as it was in sync with the increased demand and construction levels and general inflation,” reports Thrasyvoulou.
The price dropped to around $3000 following the global economic crisis; it’s the rise after this time that has been so unexpected. “[The price] has increased back to unprecedented high levels when construction demand and the world economy has still not recovered,” reports Thrasyvoulou.
“This is out of sync with the general construction market and when things are out of sync they create problems,” he stresses. “The big difference, apart from the price level, is the extreme volatility of the price. Gone are the days of a stable price and gentle fluctuations of a few hundred dollars,” stresses Shaw.
Reasons for change
With the copper price clearly not following the general construction market, and indeed overall world economic trends, what is causing this discrepancy?
Several factors appear to be to blame, including production levels, global stock market investment traders and the demand from markets that are undergoing strong growth, primarily China.
“It’s a commodity just like oil, which is affected by political and economic factors,” stresses Thrasyvoulou.
“Up to 2008, we could explain the behaviour locally as the GCC market was following the general global demand trend, but now there is an imbalance as growth and demand in some parts of the world are much stronger than others,” he adds.
Although demand from China is reportedly one of the biggest factors, the fact that this has come at a time of reduced global copper production has increased the impact of this issue.
“The demand from China for this commodity is probably the largest cause of volatility, but it is also affected by the dollar exchange rate, economic states and trends and the fact that for the first time in over five years the stocks of copper have been reduced by over 30%,” explains Harper.
“Due to the economic crisis the industrial production was cutback more than expected in 2009, which lead to less stock and thus prices rising again,” reports Drake & Scull International MEP procurement manager Mohammad Azzam. “The stocks fell sharply in the first half of 2009 as China mopped up the surplus stocks,” adds Azzam.
The fall in strength of the Dollar has had as significant an impact on copper price as it has many other global issues.
“The recent run up would appear unrelated to physical demand and more correlated to the fall in the [US] Dollar and the activities of big investors,” reasons Shaw. “The weakening of the US Dollar has impacted a lot on the increase in price of copper,” agrees Azzam.
Maintenance work at the mines has also played its part as has the availability of natural resources. “North and South America contribute 41% to the total copper production and is often affected by labour unrest; while Asia and Africa, contributing 34% to the total copper production, can be affected by political unrest,” explains Azzam.
The impact on business
The volatile copper price has impacted both product suppliers and contractors serving the construction industry in a number of ways, with varying tactics being used to overcome the issue and reduce the effect on overall business and enable future planning.
Many of the products involved are MEP-related and the effect on product prices generally depends on the proportion of copper that they contain relative to other materials.
Products such as hv cables, busbars, transformers and copper pipes and fittings, where the copper value may be 80% of the total price, for example, will be affected much more than those such as control cables, switchgear and air conditioning units, for which copper may only represent around 25-30% of the total price.
Product manufacturers report a general cautiousness from the market when ordering and a need to ensure flexible contracts are agreed. “Customers are unsure when to place orders due to the volatility,” reports Shaw.
“For project work, we quote prices on a variable metals basis, so when it comes to placement of the order we will buy the copper and then fix the price for the client,” reports Aittis.
“This is the norm because it can have such a big impact on pricing it’s too risky; some contracts are fixed price and with these we can have a problem; we have to protect ourselves from price variables because [product materials are] our business,” he stresses.
“The continual increase in [copper prices] makes it very difficult to provide a competitive price for the product being bid while covering the risk of the copper impact, assuming it continues to increase,” stresses Harper. “It’s no longer possible to fix prices, even 30 days is difficult as so much can change,” he adds.
Contractors agree that there is a need to maintain a close watch on copper price prior to ordering products in order to protect profit margins on project tenders.
“You have to always consider the prevailing copper price when tendering for new projects and consider the sensitivity of your overall price versus forecast movement in the copper LME. Then you have to take a calculated risk trying to anticipate what the competitors are doing as well; it’s a daily part of our business/ industry,” stresses Thrasyvoulou. Azzam adds: “We have strategy to book the copper immediately upon award of the project in order to avoid any future risk.”
Minimising the risk associated with fluctuating prices is the primary aim of both suppliers and contractors as they try to safeguard business plans. Again, a number of strategies are being used by firms to optimise their operations.
“Copper is always secured in bulk quantities at favourable prices to allow us to deliver the most cost-effective solutions possible,” explains Harper. Gauging just when and how much material to buy, however is a risk in itself.
“It’s a case of taking care not to overstock, because of the changing price. If the price suddenly falls and you have a lot of stock then you will have to write it down,” explains Aittis. “A lot of manufacturers were caught out at the end of 2008 as they had a lot of stock held.
“Also, cashflow protection. When the cost of stock is so high, the cost of holding stock is also higher. We are tailoring our copper stocks to our business requirements on a day-to-day basis.”
For contractors, the tender stage requires a balance over price cautiousness with a need to win the contract.
“There are hedging strategies you can use once you secure the project for booking the copper in advance, but this is not as simple as one thinks as MEP Contractors don’t buy the copper itself but copper-related products for which you can only finalise the selection once the project is at an advanced stage,” stresses Thrasyvoulou.
“Nevertheless, there are hedging strategies against the copper LME index itself that one can use to counter erratic increases in the copper price,” he adds.
The natural urge when the price of one material or product is high is to switch to an alternative.
“Worldwide there is always a move to substitution when copper prices rise, but it isn’t so easy to do in the electrical industry,” stresses Shaw. “Utilities tend to make a decision to go with either copper or aluminium conductors and then stick with it; it is difficult to run with dissimilar metals in a system,” Shaw explains.
Another issue with electrical products is local regulations. “Local regulations do now allow the use of aluminium, which is the main alternative to copper within the electrical industry,” Harper explains.
Savings can be made while continuing to use copper cabling, however, as manufacturers develop new product ranges. One of the most successful of these to date is modular wiring.
“The largest benefit of modular wiring systems is the reduction in labour that is required at the installation stage on site. This is one way that clients can offset the price increases,” explains Harper.
“Copper will affect the price of cables whether a client invests in traditional cable or a modular system, but traditional cable systems can reduce manpower requirements by up to 70% and therefore, the direct and indirect costs associated with it,” adds harper.
Outwith the electrical sector, there has been an uptake of alternative products, particularly for plumbing installations. Jens Schuell, marketing manager, Uponor International, says: “There is a general tendency in the construction industry [globally] that copper will be replaced by plastic materials.”
The firm’s composite pipes are designed to offer similar benefits to copper pipes. “Our distributors have seen a rising demand for indoor use of multilayer composite pipes for tap water installation as well as for risers and of pure cross-linked polyethylene pipes also mainly for distribution pipelines in the floors from the risers to the tap,” says Schuell.
Further developments will enable more choice for contractors and perhaps a less risky future when it comes to pricing. “Manufacturers always come up with new innovations and developments in order to make their product much reliable and efficient,” states Azzam. “Schneider has recently come up with the use of bimetallic material composed of aluminum-copper alloy as a core metal instead of copper,” he adds.
“In the longer term, low temperature super conducting cables will offer a solution of much higher electrical capacity for much less material, but these are years away before they will reach mass market in the transmission sector,” reports Shaw.
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