copper

Copper

Industry Insight

Date March 2018

Approximate net recovery on cost

Synopsis

Current trends

  • 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

 

Projected Values 

 

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Alloy and form key to valuation: Copper can be rolled, drawn, cast, or extruded into a myriad of products. Common applications include building construction (43 percent), 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. Copper is very malleable; 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 materials 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).
 

Market improving: After plummeting prices for the metal resulted in output cuts, 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. Typically, 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 saw a low level of unscheduled production losses (approximately 3.5 percent) and copper prices continued to rise. In December 2017, copper prices surged with no indication of a forthcoming correction. As of early 2018, prices were trending at their highest rates since 2014.
 

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 its 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 over one-third of total copper usage, and construction, including wiring and water tubing, form a similar share. Transport industries use roughly one-eighth of the total, industrial machinery and equipment use approximately 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. Additionally, copper and the U.S. dollar have a negative correlation; whenever the dollar rises, copper prices fall, and vice versa.
 

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 that large supplies of scrap could weigh on the price of copper, but scrap industry veteran Michael Lion noted that he was not convinced, adding 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, according to Lion.
 

Commodity forecast: The world price of copper is expected to continue to increase through the first half of 2018. As of January 2018, pricing had reached its highest level since mid-2014.
 

The technology in electrical vehicles heavily relies on copper, and the more advanced the technology (and sales) become, the more copper the industry will require. Copper is also necessary to manufacture wind turbines and solar energy systems, which are growing in popularity. Additionally, global demand for electricity is expected to continue, which also requires large quantities of copper.