The Longview of Copper Prices with John Gross by Taras Berezowsky on April, 2011 | MetalMiner
When it comes to the long-term view of the ups and downs in the copper market, it can be argued that John Gross has it covered.
As China's monster copper appetite stagnates a bit and the world's copper producers gather at the CESCO conference in Santiago, Chile, the red metal is an extremely hot topic this week. Gross has been involved with copper for more than three decades, running the gamut from metal buying, brokering and trading, to having served as director of the American Copper Council and member of the COMEX Advisory Committee.
As current president of Rhode Island-based J.E. Gross & Co., Inc, a metals management and consultancy firm, Gross also publishes The Copper Journal, once a print-based industry newsletter and now an online site featuring data-driven price and inventory charts. He founded the CJ in 1989.
I spoke with Gross to get his take on where copper has been and where it is headed.
METALMINER: What do you consider to be your specialty within copper consulting?
JOHN GROSS: Primarily managing price risk, which has become increasingly more important with volatility in markets. That could be from managing price risk exposure for companies, conducting hedging for companies or advising them in that process along the way.
MM: So the Copper Journal has been running since 1989 what has changed in the industry and what has stayed the same?
JG: If we were to look at the industry, and the significant changes over the past 20-30 years, we’d have to take the US industry as an example. The number of US producers has declined very dramatically. There were 9 or 10 primary producers in the US in 70s and 80s, such as Kennecott, Freeport-McMoRan, and ASARCO. Whether companies closed down, or whether they were acquired, the [bottom line is] the number of producers has declined. On the secondary side of the market (in the early 80s), there were five major smelters of copper scrap, and today there are none! The same result has applied to the consumer side of the business.
What has remained the same is the mechanical structure of the market; the pricing mechanism within North America for the most part, with COMEX as the base price mechanism. But floor trading has dwindled considerably. It’s part of the evolution of the industry. Also, despite the ebb and flow of the economy overall, copper is the single most important industrial metal in the world. Volume-wise, copper is third compared to steel and aluminum, but it’s still more important.
MM: Where do you stand on the issue of substitution (e.g. aluminum replacing copper)?
JG: Any time you get a run-up in price, like in the 70s and 80s, the issue of substitution comes to the surface. Indeed, there are many areas in which this can occur. The price of copper is almost three times the price of aluminum, so where a company can use aluminum in wiring, for example, or in auto applications, that would be an economical alternative.
MM: Your thoughts on how China plays into the copper market these days?
JG: If we go back prior to 2010, the US had been largest producer/consumer of primary copper in the world, and in 2002, China overtook the US and has grown dramatically. China accounts for 40 percent of global copper demand, and to verbalize the obvious, it will continue to have significant impact on the market. But it becomes a question of the rate of growth that will be in place. China has been working to slow growth to some degree. We’ve seen reserve requirements put in place over the last several months, and we’ve had interest rate rises. Long-term trend is continued growth. Last year, it grew at slower rate. The other major issue is we don’t have good, solid statistics out of China. There’s [hardly any] transparency. That won’t change anytime soon.
METALMINER: Simon Hunt recently said in an interview that most of the copper consumption in recent years has been due to financial investment rather than industrial purposes; do you agree with that sentiment?
JOHN GROSS: I would. You can take it from two different points of view: the heightened level of speculation in the market, which directly contributes to volatility, and the advent of ETFs in the metal market. Although [ETFs] have been on “Page 1 as early as a few months ago, they’ve fallen to say page 2 or 3 recently. But the assumption there, the logical progression, is that if the [physically backed] ETFs are requiring physical metal to support them, they will take metal away from the industry.
MM: What about reports of the discrepancy between “actual consumption and “apparent consumption in China, which could indicate oversupply rather than shortage?
JG: The difficulty of oversupply is you can’t quantify it. You are guessing what it may or may not be, and there is little to be gained from that.
MM: What are a few important points that a company should know about hedging their copper buys?
JG: Each sector of the industry has its own traditional approaches to pricing of metal. The key issue is, if a manufacturer is selling metal over a certain time period, it is incumbent upon them to hedge their price riskÂ¦In terms of hedging copper buys, the question should be turned around. That is to say, how a company sells copper contained in product should dictate how they buy.
For example, assume a wire & cable manufacturing company sells copper in cable with the ‘copper price in effect on date of shipment’ and they ship consistently throughout the month. The company is generally receiving the average price over the course of the month and therefore should be buying copper at the average price in that month. Thus, they are inherently hedging their risk.
On the other hand, if a company today is making a sale for delivery in, say, September at a firm price, they should lock in a purchase price with their supplier, or alternatively buy a September futures contract as an offset to the sale.
MM: Are futures the best/preferred way to go? Or are there other forms of effective hedging?
JG: The futures market is the most logical approach. Options can be viewed as an alternative, but typically they become more expensive, which reduces their viability for many companies.
MM: Are you in the camp of the bulls in terms of continually rising copper prices throughout 2011 and beyond? What’s your forecast?
JG: I cannot say I am in the camp of those who expect the price to rise continuously. Instead, I watch the market day to day. In my mind, there are too many risks that may prevent the market from achieving the record high prices that many anticipate. Although if, as expected, the market will be in deficit this year, we have seen inventories on COMEX, LME and Shanghai rising — with the total up almost 112,000 metric tons since year-end. Also, the forward price curve has changed dramatically over the past few months. May 11 an 12, for example, was in a 16 backwardation in mid-December, but is now trading at a 4 contangon I don’t discount the possibility of higher prices, but I would have to see inventories decline, the backwardation return, and evidence that demand from China will not be negatively impacted by a slower economy.
MM: I know you’re a copper expert, but any specific thoughts on other base metal activity that buyers should keep an eye on?
JG: The one thing I’m concerned about and this applies to all base metals is that we have a very significant bubble developing in metal markets and commodities overall. At some point it will correct; I don’t know when, and I don’t know what will cause it, but it will correct at some point. Certainly copper, lead and zinc are the big [ones to follow]. With aluminum, there’s an excess of 4 million tons in inventories. Arguments exist that metal is tied up in financing, but that doesn’t mean the metal itself does not exist!