As copper price booms, ‘bust’ is a scary thought

The current meteoric rise in copper prices is due partly to China’s explosive economic growth, as that country snaps up the metal to use in construction, industry and consumer products.

But other factors are at play, too:

• Copper demand is growing in many nations, as they either develop their economies or climb out of the Great Recession.

• Bringing new mines online to feed that demand takes a lot of time and money.

• New investment vehicles for copper could take some supplies off the markets – and just the possibility has already sent prices skyward.

In Arizona, the surging prices are triggering more copper exploration and mining, creating new jobs (see related story on Page A1).

But the boom carries a potential downside. Prices are rising so furiously that a copper bubble could occur, hurting the same copper companies that are riding high today, some experts say. That could send prices crashing when the bubble bursts – adding another chapter onto the long boom-bust story of the copper industry.

Experts say the higher prices could also hurt many industries that use copper – in cars, homes, computers and thousands of other products.

Here are some key facts about rising copper prices:

SUPPLY AND DEMAND

For the first nine months of 2010, demand for refined copper worldwide exceeded supply by about 480,000 tons, according to the International Copper Study Group, a global organization that researches copper issues. That compares with about a 60,000-ton deficit through the first nine months of 2000.

A 480,000-ton annual copper shortfall is more copper than would be produced in a year by four mines the size of the proposed Rosemont Mine near Tucson.

Worldwide refined copper use of about 16.1 million tons over the first nine months of 2010 was 8 percent higher than in the same period of 2009.

The growth was led not so much by China, whose use rose about 4.5 percent in 2010 from a strong 2009, but by increases of 11, 27 and 7 percent in the European Union, Japan and the United States as the economy recovered from severe recession, the study group said.

But global refined copper production of nearly 13 million tons in the first nine months of 2010 was only about 0.8 percent more than during the same period period in 2009. In 2011, formal projections are for a global mine production increase of 5 percent but the actual increase is likely to be less due to project delays, technical problems and labor and political unrest, the study group said.

Copper stockpiles, globally, have dropped: from about 1.1 million tons on the London Metal Exchange in 2001 to 551,000 tons in early 2010 to about 412,000 tons by the end of September 2010.

HOW HIGH?

No consensus exists on specific numbers, but many forecasters, including the financial firm Goldman Sachs, say demand could rise fast enough to take the price to $5 a pound sometime between 2011 and 2013, compared with a range of $4.29 to $4.40 during the past week.

Thirteen of 14 industry analysts surveyed by the business wire service Bloomberg News said they expect a copper shortage this year.

CHINA’S GROWTH

Copper consumption is likely to grow 6 percent annually in the next few years, the British-based industry analyst firm GFMS reported in late 2010. In 2009, China’s copper use grew 38 percent from 2008, the International Copper Study group said.

Ten to 15 years ago, China was responsible for 10 to 15 percent of the world’s copper demand. Now, that’s up to 35 percent, said Bob Loewen, a consultant for some Arizona copper companies.

“They’re really driving this market,” Loewen said. “When they are 35 percent, that is the huge elephant in the room.”

China is going around globally buying copper mines “anywhere they can get them,” said Michael Smith, president of T&K Futures and Options in Port St. Lucie, Fla. “The more they do it, the more the price is bid up.”

PRODUCERS CAN’T KEEP UP

Copper mines globally are producing well below their capacity – 79 percent this year, compared with 81 percent a year ago, says the International Copper Study Group. Although higher prices for a commodity typically cause suppliers to produce more, production isn’t rising nearly fast enough to keep up with the demand.

There can be material and labor shortages and labor unrest, plus there is the difficulty of hiring and keeping skilled employees in a boom-and-bust industry such as copper, said Daniel Edelstein, a copper specialist for the U.S. Geological Survey.

Plus, mines never operate at 100 percent capacity; even in good times it is 90 percent, he said.

“Capacity is based on a mine’s average operating rate and on ore grades,” Edelstein said. “Just because things are going great, the mines won’t necessarily be operating. Mines aren’t just like factories where you just flip a switch.”

Typically, copper supplies increase relatively slowly in response to higher prices, due partly to the long periods it takes to get a new mine approved by regulators, copper consultant Loewen said.

“Look at how long it has taken for Augusta to get through the permitting process,” Loewen said, referring to Augusta Resource Corp., the Canadian-based company – and a client of Loewen’s – that is trying to develop the Rosemont Mine in the Santa Rita Mountains southeast of Tucson. “That is not uncommon in other countries.”

A BUBBLE?

Many experts, including University of Arizona economist Marshall Vest, say a bubble is possible. While much of the price surge is due to natural forces, part stems from the announcement in late 2010 of plans to create three new investment vehicles for copper that would take already scarce supplies off the market.

Two of these vehicles, known as exchange-traded funds, or ETFs, have been proposed by banker J.P. Morgan and asset management firm BlackRock in the United States and are awaiting federal Securities and Exchange Commission approval. One in Great Britain has been approved by that country’s government.

In an ETF, a company sells shares of copper or another metal. The copper goes off the market until those who hold the shares are ready to sell – at a higher price.

Beyond that, Bloomberg News, the Wall Street Journal and the Financial Times have reported that J.P. Morgan has also snapped up a significant percentage of copper supplies – 50 percent or more – now being held at the London Metal Exchange, one of the key trading markets for copper investors.

By themselves, the plans for new ETFs and J.P. Morgan’s copper stock purchases have already added about 68 cents per pound to the copper price since October, said Peter Hollands, managing director of Bloomsbury Minerals Economics, a consulting firm based in the United Kingdom.

The company regularly makes short- and long-term forecasts for metals prices.

“Given that total copper stocks will be falling, not rising, in 2011 and 2012, the upside potential for prices is explosive,” somewhere in the $4.50 to $5.60 per pound range, Hollands said in an interview via e-mail.

Here’s how the rising prices could affect industries and consumers, according to some experts:

MINING COMPANIES

Such increases eventually could hurt copper producers, depending on how much new mine production occurs. Later, if investor demand gradually decreases or if disinvestment were to occur, “the industry would be saddled with both excess stocks and excess capacity,” Hollands said.

Some copper-industry officials, however, say the copper market’s fundamentals have changed so much recently due to China’s and India’s growth that prices will never crash again to the low levels of less than a dollar from the 1980s and 1990s.

Even during the recent economic collapse, when copper prices plunged from $4 to $1.30 a pound or so in less than a year, the price rebounded fairly quickly back into the mid-$3.50 range during 2009 due to demand in China, observed Tim Marsh, owner of Bell Copper Co., which is trying to develop a new mine in Miami.

MANUFACTURERS

Luvata, a global manufacturer of copper and brass fabricated products, is a huge multinational corporation that has raised alarm bells about the rising copper prices.

Among other things, Luvata makes copper heat exchangers for industrial use and home construction, copper products for solar panels, tubing for air conditioners and wires for MRI machines and other superconductor applications.

Last year, the company took a non-scientific, website survey of 250 customers and prospective customers, and more than half responded that the ETFs and the price swings in general will hurt their industries, the company said.

Such price changes drive manufacturers crazy, said Warren Bartel, a top Luvata official.

“They can’t predict their cost. If they can’t predict their cost, they can’t properly price their product.”

Worse, higher prices will drive many manufacturers to seek alternative materials such as aluminum or synthetics whose prices are less volatile, Bartel said.

“If we lose our customer base, it undermines the foundation of our business.” Bartel said.

Other industries such as homebuilding, construction and electrical contracting will have to eat higher copper prices because they can’t pass them on to consumers during tough economic times, their representatives said in interviews. That will squeeze profits out of industries already suffering from the housing collapse, they say.

CONSUMERS

For consumers, however, rising copper prices may not be much of a threat, said an economist who is regularly quoted in the national press.

That’s partly because so many other companies are doing well enough to absorb copper price increases even as some, such as construction and housing, are floundering.

Said the economist, Jim Smith of Chapel Hill, N.C.: “Corporate profits in the United States in the third quarter of 2010 were the highest ever seen in relation to our overall national income since World War II, except in 1950 when we were gearing up for the Korean War. … I feel quite sure in saying that it will not lead to significant increases in inflation rates.”

Copper bY THE NUMBERS

439 pounds

What an average new single-family home requires

5 pounds

What a typical dishwasher contains

2 pounds

What a typical clothes dryer contains

Source: Copper Development Association, a national industry trade group.

“Mines aren’t just like factories where you just flip a switch.”

Daniel Edelstein

U.S. Geological Survey specialist

Contact reporter Tony Davis at tdavis@azstarnet.com or 806-7746.