Any distributor who's trying to time wire purchases according to the price of copper has got to be feeling dizzy by now.

For over two months, the spot price of copper on the world's commodities exchanges has been flirting madly with its all-time high — even surpassing it mid-day on a few occasions — but it can't seem to close the deal. The price has yet to close above the $4.07-per-pound record set after a dramatic run-up in April and May 2006.

In the two years since that spike, the electrical industry has had to adjust to a new kind of normal, says Pete Comber, executive vice president of sales and marketing for Omni Cable, West Chester, Pa.

“We never paid attention to the price of copper until about 36 months ago,” Comber says. “It was 70 cents to 90 cents for 15 years. There are certain “A” items that we sell a lot of, and you just knew the price of that product. You never had to call the factory. Then copper went up, and we have no idea what our prices are now. So 36 months ago nobody even thought about copper, and now that's all they think about on the commodity side.”

The million-dollar question, whether conditions in the copper market are poised for another run or signalling a move lower, continues to be the source of endless debate and speculation.

Betting big either way may be a fool's game, as the fundamentals could be used to argue in either direction. An ongoing strike in Chilean copper mines, low copper inventories at the metals exchanges, soaring transportation costs, a falling dollar, demand continuing to boom in China, the U.S. credit-market disruption and the resulting drop in construction, the wider slowdown in the United States spreading to other world economies, the list goes on. Even the experts who spend all their time tracking and trying to understand the copper market seem to be stumped.

“We're right at the point where the price could go either way,” says John Gross, a long-time copper market analyst and publisher of the Copper Journal. “One would be hard-pressed to draw an absolute conclusion right now as to whether prices will move sharply higher or pull back. There are too many conflicting influences to say where it goes next.”

At the moment, there's a precarious balance between supply and demand, Gross points out, but changes in just one or two of the factors that influence the market could spur a dramatic move in either direction.

Copper by its nature is a cyclical commodity. It's in only its fifth bull market since 1973 (see chart, page 27). From that macro perspective, Gross sees an overall softening of prices ahead. Eventually. Probably.

“If we look back at history, we can see that initially the fundamentals begin driving the price higher, and then speculative activity comes into the market and it gives a boost to prices, the market peaks out, and comes down. That is, on a macro basis, the result of the lag that occurs between the long-term commitment of a mining project coming on-stream as opposed to the shorter-term impact of demand changing in response to changing economic conditions. With the price having been very high for a protracted period of time, production has increased very dramatically. That production is essentially locked in — once the mining, smelting and refining operations start, they don't turn off. We now have the economy in the U.S. fairly weak, and that weakness is beginning to show up in other economies. That will spell weaker demand going forward. Production will continue rising, and that will add pressure on prices to the downside.”

When and if that pressure will lead to lower prices depends on a lot of other factors. Here's a look at the two sides of the coin (assume it's a penny) — the reasons the price may shift dramatically upward, and the reasons it may move back down. Which one lies in our future (perhaps both) is uncertain, but the following discussion will give you an idea what to look for, and some thoughts on how to handle your inventory in the meantime.

Why the Price Will Rise.

China

China's construction boom has given it an insatiable appetite for copper and just about every other base metal. With 1.3 billion people and a rapidly expanding middle class, demand for cars, air conditioners, refrigerators and other copper-laden goods, along with buildings and infrastructure, is off the charts.

On top of that demand, the flurry of new construction and upgrade projects in preparation for this year's Summer Olympics in Beijing has made China the destination for over 30 percent of the world's copper production over the past few years. China is expected to spend $1 trillion on infrastructure by 2009.

One well-regarded commodities fund manager, Frank Holmes, CEO and chief investment officer of U.S. Global Investors, got a lot of press in March when he told a meeting of copper traders in Phoenix that he expects copper to trade in the $8-to-$10 range in a few years. He pointed to the size of the infrastructure needs in China and India and the rapid growth of their economies as the reason.

Mine strikes

Compounding that growth in consumption are continuing worries about supply-side disruptions. Strikes by workers at the Codelco mines in Chile, the largest underground copper mines in the world, have reduced output from a major source of copper. The strike is in its third week as we go to press, and even if it is resolved quickly, it underlines the uncertainty about copper supplies in the global market, says John Mothersole, principal, Pricing and Purchasing Service, Global Insight, Boston.

Politics

“Although there are what appear to be a resource base that's capable of satisfying global demand growth, there is this worry that this supply base won't be brought into production at anywhere near a timely enough fashion to prevent the kind of tightening we're seeing now from occurring,” Mothersole says. “Something like three-quarters of the estimated increases in capacity over the next three to five years are in areas of elevated risk. Specifically, most of the new capacity is coming online in either South America or in Africa, and hence there's political risk and concern. That's captured in the growing nationalism in these developing regions that is affecting the investment climate.”

In Congo, which lies in Africa's very promising copper belt, and in Mongolia, governments are undertaking reviews of existing mining contracts to determine whether the terms granted to foreign investors were too generous. These reviews raise concerns that major mining projects expected to start production in the next year or two may be delayed, Mothersole says.

Weather

There are also concerns about power generation due to the dry South American winter, which could bring further supply problems. Chile's copper mines depend heavily on hydroelectric power, and unless rains come soon, there may be power shortages as South America heads into winter.

Speculation

The main driver giving copper pricing a lift right now is speculation on the commodities market. Investors are putting money into copper and other metals as a hedge against the falling value of the U.S. dollar. If the Federal Reserve keeps loosening credit and the dollar continues to decline, the price of copper will continue to rise.

Gross sees an inflection point at $4 for the speculators, which includes technical traders. If copper does close above $4, he expects it to continue higher as a result of crossing that threshold.

Why the Price Will Drop.

Recession

Outside of China and India, consumption of copper is actually down. Sluggish western economies and the dramatic slowdown in construction in the U.S. and increasingly in European countries ease pressure on prices.

Post-Olympics China

“The question is, can China continue to grow as strongly as it has?” says Mothersole of Global Insight. “It's probably unsustainable even in the near-term. When you look at their base consumption growth, it looks frothy. Our expectation is that China's GDP growth is going to slow. The watershed event will be the Olympics. The marker will be what happens the last couple of weeks in July. The Chinese government is closing down a lot of construction sites as of July 20, so in early August we should see if a lot of the consumption growth was directed at general infrastructure preparing for the Olympics and China's ‘coming out party.’ As soon as those begin to wind down, we should expect to see a slowdown in consumption growth pretty soon. We expect copper will swing to a modest surplus, predicated on this slowdown in China.”

Mothersole also expects to see a slower rate of consumption due to the character of China's growth. “What's been happening in China is excessive investment in heavy industry,” Mothersole says. “Chinese base metal consumption is not being driven by new air-conditioners, cars and refrigerators for China's domestic market. Most of it is directed toward heavy industry for the export market. I don't think in the long term that's beneficial for China's growth.” As overall consumption of Chinese goods slows because of conditions in its biggest export markets, its appetite for copper should ease.

Compounding that uncertainty, actual consumption in China is difficult to measure anyway, because there's no way to get confirmation of the numbers. “It's the difference between reported versus real consumption,” Gross says. “If you don't know the opening inventory, and we don't because it's a state secret, and you don't know the closing inventory, you're only assuming what the actual consumption is. We talk about consumption being up 36 percent in China, but we have no way to check.”

Currency

If we see a rebound in the value of the dollar or if investors regain confidence in the stock market, that speculative money will leave the metals and other commodities that investors moved into for protection from the dollar's weakness.

Supply

If the strikes in Chile are resolved quickly and those mines return to full production, they could fill the market with copper and bring prices down.

A forecast released last month by the International Copper Study Group (ICSG), Lisbon, Portugal, calls for copper production to increase 7 percent in 2009 to 19.9 million tons.

What to Do.

Come August, the picture should get a little clearer. Once the Olympics preparations come to an end, once we see whether it rains in Santiago and whether Codelco comes to terms with its miners, we'll get some sense of where the copper market is headed.

The safest bet may be to stay light on your feet and move with the market. In other words, buy and sell in as close to real time as you can. Distributors fixated on buying wire in truckload quantities need to work through the math and be ready to reconsider their policies.

Watch total delivered cost of wire

“Distributors need to pay attention to more than just the price of copper,” says John Myers, an industry consultant and former executive of Houston Wire & Cable (a man so entrenched in the wire business that he uses “wireman” in his e-mail address). “Distributors have no control over the price of copper. They have to rely on their suppliers to treat them fairly and get the product they require at a fair price. With higher transportation costs because of the price of oil, they need to look at the total laid-down cost to put that wire in their warehouse. These costs are real, and need to be factored into the selling price to the end user.”

Price on replacement cost

“I think one of the biggest issues distributors have now is they have to look at market level and not inventory price,” says Comber of Omni Cable. “End-users are becoming much more savvy because they know that someone in the market's got a below-market-level cost, and if they work hard enough, they can get someone to break off the market price. I've heard distributors say it's frustrating, because you try to mark up off the current replacement cost, and someone in the market has a lower cost and the contractors work to find that person and then work them for the order. Everyone on the buy side has become that much better, because they've had to.”

Buy as quickly as you sell

One thing distributors ought to consider is buying wire more frequently. “We're sort of naturally hedged because we buy every day,” says Chris Bertolami, vice president, supply chain, for Omni Cable. “We're selling it today, buying it today, selling it tomorrow, buying it tomorrow, so as the market goes up and down, we're naturally moving with the market.

“We do buy some puts — though we've scaled that back a little bit — but we've taken puts and leaned them up against our inventory, and said ‘let's protect what we have in case the market tanks.’ So we'll buy a put at lower future price and if the market goes down, we get some money from the put and take that money and go buy more inventory and average our cost down.”

Cover long-term pricing agreements or renegotiate

Distributors who have long-term contracts with customers to buy at a protected price need to revisit those agreements in light of the current pricing, Myers says. “It's all price at time of shipment now. That's the fairest way for both sides. But the distributor has to get the customer to agree to that also. It's difficult but realistic to go back and renegotiate those prices. Customers realize what's going on, and they've got to get their job done, they can't wait around. That's the realistic approach to it.”

The daily calls Omni used to get from its distributor customers asking where copper prices were headed are no longer the everyday occurrence they were in 2006, Comber says. “We still get calls about firm pricing — they don't know exactly how much they need, but they want to lock in today's price for six months. Maybe somebody takes that kind of deal, but not us. If a customer wants firm pricing, we only take those orders on a non-cancellable, non-returnable basis.”

Consider substitutions

As copper approaches the $4 mark, Comber of Omni Cable also has seen more interest in aluminum wire than before. Omni didn't even stock single-conductor aluminum before the price spike two years ago, but $4 seems to be the price level at which customers are willing to consider going up two sizes and buying aluminum. With the other added costs of larger conduit it still may not be the solution a customer wants, but distributors need to be aware of the alternatives, he says.

Watch your warehouse

With the price for scrap copper rising along with the refined price, theft has become a serious problem (see sidebar, Come and Get Me, Copper). Most distributors are taking sensible precautions, moving their wire spools into the warehouse rather than leaving them in the yard. You need to watch what happens to odd lengths and scrap pieces as well, something many distributors' inventory systems are ill-equipped to handle. Omni Cable has an in-house system that tracks every fragment of copper they own, and recently appointed a person whose primary job is to account for all the scrap.

Hang on

“We are moving into uncharted territory,” Gross says. “There is uncertainty, whether from China, India and other emerging economies, inventories are critically low, and that could very quickly push the price higher. Any company dealing in copper or other commodities traded on exchanges has to have a long-term strategic plan for how to respond to changes in price. They need a strategic plan to manage decisions on a day-to-day basis to mitigate price-risk exposure. If you're selling product over the course of the month, you want to be buying product over the same time frame. You want to buy and sell back-to-back as much as possible. Otherwise, find another avenue for mitigating that price exposure.”

Come and Get Me, Copper

Freelance harvesting of copper has become the rage among the criminally inclined all over the world. People are pilfering copper from anyplace it can be found. Thefts of copper plumbing and wiring in any abandoned structure have risen to the point that many local and state governments are passing new laws to force scrap metal buyers to collect names and addresses of everyone who pulls on the lot with a trailer of scrap to sell.

John Gross, publisher of the Copper Journal sees such thefts as a fairly natural effect of rising prices. Scrap copper is a significant source of supply, particularly for brass mills, and the price of scrap copper tracks closely with the spot price for refined copper. The longer the price stays high, the bolder burglars become.

Among the more audacious stories we've found:

  • Darwin Award-worthy attempts to steal copper from live electrical distribution lines, often with predictably tragic consequences

  • Transportation shutdowns on metro trains due to stolen power lines

  • Phone outages from stolen telecom trunk lines

  • Statues stolen from British parks

  • Irrigation pipes pilfered from California almond groves and other farms around the world

  • Unoccupied homes with gaping holes in the walls where wire, copper plumbing and air conditioners were ripped out (this has gotten bad enough that in some foreclosure-ridden neighborhoods there are signs on the houses — “All PVC, no copper pipes”)

  • Eight tons of copper bullet caps stolen from a Missouri ammunition plant over two years, beginning with small amounts carried out in five-gallon buckets and eventually building to trailer-loads

  • A local developer here in suburban Kansas City told an EW editor about a theft that must have taken some technical prowess: the perpetrators pulled a truck up to a home under construction shortly after the wiring was installed, hooked up to the service entrance and apparently pulled out the entire house of wire in one stroke.