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The Sales Process

Feb. 27, 2024

King Copper

Sept. 1, 2003
With copper prices as low as they have been in many years, wire and cable marketers anxiously peer at their computer screens each morning to see how the

With copper prices as low as they have been in many years, wire and cable marketers anxiously peer at their computer screens each morning to see how the value of the wire and cable that they manufacture or distribute has changed since the day before. Indeed, few electrical distributors, wire specialists or wire manufacturers go a day without hearing the question, "What's copper at today?"

Copper pricing has a strong but silent pull on the attention of most companies in the electrical industry. It's an area of the electrical industry wrapped in tradition, obsession and basic business instinct. Indeed, when the owner of one family-owned distributorship began easing out of the business and spending more time at his vacation home, he still wanted to be linked via computer to the company's day-to-day finances. His computer people designed a program that enabled him to keep tabs on the business each day from his vacation home 3,000 miles away. Among the financial indicators he could track were line items ordered, daily sales per branch, gross margin per order--and, you guessed it, the price per pound of copper.

As one of the largest consumers of copper on the planet, there's always a high level of interest in copper pricing in the wire and cable market. Some varieties of wire and cable can be two-thirds copper. For example, it's estimated that copper accounts for about half the cost of building wire.

The price of wire is still closely tied to the price of copper, but growing awareness of other factors with a far greater potential to swing profits is taking hold. Among those factors, says Vince Rego, chairman of Encore Wire, McKinney, Texas, is service quality.

"I think with the people to whom we sell, the great sensitiveness to the price of copper I don't see out there anymore like it used to be," said Rego. "Essex brought that price increase out of 8.3% in early June in the teeth of a weak copper market-that was unheard of, but it went in and it stuck. So that's significant. In my travels, I don't hear about copper. People are more concerned with transaction costs and order-fill and things of that nature. You've got to be competitive, buy as good as you can, but there are other things driving this market." Many distributors and manufacturers can recite the price of copper as quickly as they can blurt out their own shoe size not only because they buy copper or copper-based products like wire and cable, but because of its impact on the value of their warehouse's wire and cable inventory. John Gross, publisher of "The Copper Journal," president of J.E. Gross and Associates, Inc., Huntington, N.Y. and the copper industry's resident pricing guru, says among the reasons distributors and manufacturers need to know the value of that inventory is that when they need financing, they may have to evaluate their assets, and the value of the wire and cable they have in stock fluctuates daily. Manufacturers also need to estimate the cost of copper during budget time to ballpark the cost of next year's production runs, he says.

For all the interest in copper pricing, it's a lot like the weather: Everyone talks about it, but almost no one can do anything about it. Many complicated and intertwined variables influence copper's price per pound. A copper miners' strike in Chile, the world's leading producer of copper; the games people play with copper futures on the New York and London commodities exchanges; or the Asian economy's collapse all shape the price of copper.

One glaring example of the volatility of copper pricing was the 1996 freefall in copper prices precipitated by Sumitomo Corp.'s copper-futures trading activity. Sumitomo's chief copper trader, Yasuo Hamanaka, was reported to have lost $1.8 billion in 10 years of unauthorized copper trading on the London Metal Exchange, according to an article on the New York Mercantile Exchange's Web site, www.nymex.com. World market prices fell 31% in less than six weeks because of those losses.

At press time, copper enthusiasts were spending even more time than usual watching copper prices, as they hovered in the 70-cents range, one of the lowest levels seen in years. A Wall Street Journal report said 1998 will be the first year in recent memory that prices won't average more than $1 per pound. Industry veterans say market dynamics suggest much higher prices. For the amount of inventory now on-hand, the price per pound is normally in the $1 to $1.10 range, according to that report.

Gross is also puzzled with copper's low price. In the Aug. 17 edition of The Copper Journal he offers an example of this inequity. Warehouse holdings in October 1991 and in July 1998 are pretty similar--348,263 metric tons in 1991 and 342,485 metric tons in July 1998. Yet the Comex price in October 1991 was approximately $1.06--31 cents higher than July's Comex average of about 75 cents. Today's copper prices just don't reflect market conditions, he says in that issue. "A review of the numbers, be it economic, fundamental or on the basis of long-term relationships, tells us that copper is in the midst of a major disconnect between reality and negative sentiment," he wrote.

While this low level of pricing is a concern to many in the industry, the copper market is a world where you expect the unexpected. During the past 15 years, anyone tracking the copper market has seen some wild swings in pricing. Gross says people pay more attention to copper pricing when the market is very active.

"From 1984 to 1986, the price was depressedand copper was trading in the 55 cent to 65 cent range," he says. "We didn't have a great deal of volatility at the time. In the 1987 period, the price rose very dramatically in a relatively short period of time and it rekindled the concern about rising prices. The market from 1987-93 was extremely volatile, both on the upside as well as the downside.

"In 1993, we had a run-up a second time, when the market rose from about 71 cents at the end of 1993 to 1995, when it was approaching $1.50. This had a very substantial impact on anybody's business involved with copper.

"Companies that managed their businesses very conservatively, had price commitments and managed their inventory valuations rode out the storm reasonably well. Companies that took a more speculative point of view and thought the market was going to fall may have gotten hurt. In that whole period we had Sumitomo, and that added another element of unpredictability. When you get these very substantial swings it raises the level of interest."

While he agrees electrical distributors must know the price of the wire and cable they are buying and what their wire and cable inventory is worth, Jim Newton, president, Sales Tech Corp., South Hadley, Mass., thinks some distributors go overboard with the attention they pay to copper pricing.

"It's almost a rite of manhood in this industry, " he says. "Some distributors spend an inordinate amount of time shopping around, playing this kind of market. The gains they receive are so miniscule when they take their total cost of ownership in tying up dollars and all kinds of things. It's just something you do in this industry." Newton believes this obsession with copper pricing is at the root of wire and cable's image as a commodity. "The world looks at wire and cable as a commodity for good reason--that's the way the manufacturers treat it. With few exceptions, they never sold it other than by pricing."