Date May 2017
Approximate net recovery on cost
- Industry experts agree that the worst of the copper crisis has passed; the industry’s recovery, however, is likely to be slow
- Industry revenue is forecasted to grow at an annualized rate of 1.6 percent to $19.6 billion over the next five years, but growth of only 0.3 percent is projected for 2017 due to continued weakness in the world price of copper
- The global copper market is going to be playing “offence” over the next 10 to 15 years as it attempts to offset the decline in Chinese consumption
Alloy and form key to valuation: The two most important properties of copper are that it is is good electrical conductor, and that it is malleable and simple to fabricate; it also has fairly good corrosion resistance. Copper can be rolled, drawn, cast, or extruded into a myriad of products. Common applications include building construction (43 percent of market usage), electric and electronic products (19 percent), transportation equipment (19 percent), consumer and general products (12 percent), and industrial machinery and equipment (7 percent).
About 70 percent of copper is used as a conduit for electricity. Approximately one-third of copper production is supplied from scrap with the remainder coming from mining of virgin materials. Fabrication costs as a percentage of the base metal value have, in recent years, been relatively low. As base copper prices decline, fabrication costs as a percentage of the total value of copper products will increase. As such, the scrap value of copper as a percentage of cost will decline when copper prices fall as fabrication costs are not recovered when the material is scrapped. Standard copper products in standard sizes and quantities with material certifications that are widely used will continue to generate strong recoveries in the secondary marketplace (after being adjusted for any base metal market price adjustments).
The worst is over: After plummeting prices for the metal resulted in output cuts, as of April 2017, most industry experts agree that the worst of the copper crisis has passed. The industry’s lowest point occurred between the latter half of 2015 and the beginning of 2016. Usually the copper market can expect approximately 5 percent of annual production to be disrupted by labor disputes, bad weather, government interference, power outages, or simply falling ore grades impacting production. But 2017 has thus far seen a low level of unscheduled production losses (approximately 3.5 percent), and copper prices continue to rise.
However, industry heads also agree that recovery will likely be slow. A good deal of the industry’s current recovery occurred from October through November 2016 and the beginning of 2017. The beginning of 2017 saw prices as high as $3.08, but dipped to the $2.94 range as of May 2017. Though these numbers show improvement, they are still far below the $4.50 peak copper reached in 2011.
Basis of growth: The copper industry’s growth is based on the metal’s appearance, high conductivity, corrosion resistance, ability to alloy with other metals, and malleability. While there are substitutes in specific uses, copper has entrenched itself in the electrical, electronic, and communications industries. Electrical and electronic products, including power cables, account for approximately 20 percent of total copper usage, while construction, including wiring and water tubing accounts, for approximately 40 percent. Transport industries use roughly one-fifth of the total, industrial machinery and equipment one-tenth, and a wide range of consumer and other products make up the remainder. Changes in the international price of copper drive industry performance, with higher selling prices prompting producers to increase output. As with any commodity, the price is set by supply and demand, with demand increasing as construction and electronics manufacturing increases. The world price of copper is expected to continue to increase through the second half of 2017.
Caution advised: Some industry experts have warned that “caution is in order” as the Trump administration could help the copper sector by boosting infrastructure spending, but hurt global trade with greater protectionism. Other experts have indicated large supplies of scrap could weigh on the price of copper, but scrap industry veteran Michael Lion said he was not convinced, noting that “China’s maturing economy will continue to need high levels of copper, and scrap supplies are more transparent than in the past.” China is “the driver of global copper usage” and consumes approximately 45 percent of global copper.
Forecast: Revenue for U.S. copper is forecasted to grow at an annual compounded rate of 3 percent between 2017 and 2021. According to HSBC’s Quarterly Review, the industry can expect a better outlook for Chinese consumption of copper in 2017. Additionally, higher-than-expected government spending, lower taxes in the U.S., and a better performing Eurozone economy should help sustain copper demand growth in the developed world.