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Mon 10 Jan 2011 12:00 AM

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All that glitters in MEP is copper

The copper price hit a record high in November 2010. With the material being an essential ingredient of many products used in MEP, we speak to various companies about the cumulative impact on the sector.

All that glitters in MEP is copper
Thrasos Thrasyvoulou from Al Habtoor-Specon.

One of the biggest issues with the changing price has been the erratic nature by which this has occurred. “Prices of commodities/raw materials always fluctuate. The key factor is whether the general trend is predictable and/or reasonable,” says Al Habtoor-Specon MD Thrasos Thrasyvoulou. “From the start of 2009, there has been a gradual upward trend, but on a day-to-day basis [the price] still moves up and down substantially; it can move by a couple of hundred pounds in a day,” reports AEI Cables GM Graeme Aittis.

The price rise in 2010 was substantial and, to a large extent, unexpected. “Prices were much higher than were expected by most analysts,” explains Ducab MD Andrew Shaw. On 4 January 2010, the London Metal Exchange listed the copper selling price as US$7 463/t; by mid-November the price was US$8 483, with a record high on 9 November 2010.

“[The price of] copper was very unstable last year,” confirms Darren Harper, engineering and business development manager at Prime Electrical Manufacturing and Apex Wiring Solutions. “It started at a fair high of US$6 900/t, troughed between US$6-8 000/t for the first two quarters of 2010, and from then on hit a rampant vertical climb.”

Compared to the last five to ten years, both the changes and the actual copper prices being seen are significantly different. “[The price] is at an all-time high,” stresses Aittis. “During the last five years it has been as low as £1 900 at the end of 2008, when the economic crash brought the price down, but from the start of 2009 it has been rising gradually rising.

Boom

“Prior to 2003, we were used to low copper prices, below the US$2 500/t level. With the construction boom between 2003 to 2007, this naturally increased to around the US$9 000/t level, but this was predicted and priced into the increasing costs of executing projects, as it was in sync with the increased demand and construction levels and general inflation,” says Thrasyvoulou. The price dropped to around US$3 000/t following the global economic crisis. However, it is the rise after this time that has been so unexpected. “[The price] has increased to unprecedentedly high levels when construction demand and the world economy have still not recovered,” says Thrasyvoulou. “When things are out of sync they create problems. The big difference, apart from the price level, is the extreme volatility. Gone are the days of a stable price and gentle fluctuations of a few hundred dollars,” says Shaw.

With the copper price clearly not following the market or economic trends, what is causing this discrepancy? Several factors are to blame, such as production levels, investment traders and demand from markets undergoing strong growth, primarily China. “It is a commodity just like oil, affected by political and economic factors,” says Thrasyvoulou.

Behaviour

“Up to 2008, we could explain the behaviour locally as the GCC was following general global demand, but now there is an imbalance as growth and demand in some parts of the world are much stronger than others,” he adds. Although demand from China is reportedly one of the biggest factors, the fact that this has come at a time of reduced global copper production has increased the impact of this issue.

“The demand from China for this commodity is probably the largest cause of the volatility, but it is also affected by the dollar exchange rate, economic states and trends, and the fact that for the first time in over five years the stocks of copper have been reduced by over 30%,” says Harper.

“Due to the economic crisis, industrial production was cut back more than expected in 2009, which lead to less stock and rising prices,” reports Drake & Scull International MEP procurement manager Mohammad Azzam. “Stocks fell sharply in the first half of 2009, as China mopped up the surplus.”

The fall in the strength of the dollar has had as significant an impact on the copper price as has many other attendant global issues. “The recent run-up would appear unrelated to physical demand and more correlated to the fall in the [US] dollar and the activities of big investors,” says Shaw. “The weakening US dollar has impacted a lot on the increase in price of copper,” concurs Azzam.

Maintenance work at copper mines has also played its part, as has the availability of natural resources. “North and South America contribute 41% to the total copper production, and are often affected by labour unrest; while Asia and Africa, contributing 34% to the total copper production, can be affected by political unrest,” explains Azzam.

Volatility

The volatile copper price has impacted both product suppliers and contractors serving the construction industry in a number of ways, with varying tactics being used to overcome the issue and reduce the effect on overall business and enable future planning. Many of the products involved are MEP-related, and the effect on product prices generally depends on the proportion of copper they contain relative to other materials.

Products such as HV cables, busbars, transformers and copper pipes and fittings, where the copper value may be 80% of the total price, for example, will be affected much more than those such as control cables, switchgear and air-con units, for which copper may only represent around 25% to 30% of the total price.

Product manufacturers report a general cautiousness from the market when ordering and a need to ensure flexible contracts are agreed upon. “Customers are unsure when to place orders due to the volatility,” says Shaw. “For project work, we quote prices on a variable metals basis, so when it comes to placement of the order, we will buy the copper and then fix the price for the client,” explains Aittis.

Impact

“This is the norm because it can have such a big impact on pricing. It is often too risky; some contracts are fixed-price, and with these we can have a problem; we have to protect ourselves from price variables because [product materials are] our business,” he stresses. “The continual increase in [copper prices] makes it very difficult to provide a competitive price for the product being bid while covering the risk of the copper impact, assuming it continues to increase,” says Harper. “It is no longer possible to fix prices; even 30 days is difficult as so much can change.”

Contractors agree there is a need to maintain a close watch on the copper price prior to ordering to protect profit margins on project tenders. “You have to always consider the prevailing copper price when tendering for new projects and consider the sensitivity of your overall price versus forecast movement in the copper market.

“Then you have to take a calculated risk trying to anticipate what the competitors are doing as well; it is a daily part of our business and industry,” says Thrasyvoulou. Azzam adds: “We have a strategy to book the copper immediately upon award of the project in order to avoid any future risk.”

Minimising the risk of price fluctuation is the primary aim of both suppliers and contractors as they try to safeguard business plans. Again, a number of strategies are being used by firms to optimise their operations.

“Copper is always secured in bulk quantities at favourable prices to allow us to deliver the most cost-effective solutions possible,” explains Harper. Gauging just when and how much material to buy, however, is a risk in and of itself that has to be considered.”

“It is a case of taking care not to overstock, because of the changing price. If the price suddenly falls and you have a lot of stock, then you will have to write it down,” says Aittis.

“A lot of manufacturers were caught out at the end of 2008 as they had a lot of stock on hand. Cash-flow protection is also important. When the cost of stock is so high, the cost of holding stock is correspondingly higher. We are tailoring our copper stocks to our business requirements on a day-to-day basis.”

For contractors, the tender stage requires a balance over price cautiousness, with a need to win the contract. “There are hedging strategies you can use once you secure the project for booking the copper in advance, but this is not as simple as one thinks. MEP contractors do not buy the copper itself, but copper-related products, for which you can only finalise the selection once the project is at an advanced stage,” says Thrasyvoulou.

“Nevertheless, there are hedging strategies against the copper LME index itself that one can avail oneself of to counter erratic increases in the copper price.”

Substitutes

The natural urge when the price of one material or product is high is to switch to an alternative. “Worldwide there is always a move to substitution when copper prices rise, but it is not so easy to do in the electrical industry,” points out Shaw.

“Utilities tend to make a decision to go with either copper or aluminium conductors and then stick with it; it is difficult to run with dissimilar metals in a system.”

Another issue is local regulations. “These do now allow for the use of aluminium, which is the main alternative to copper within the electrical industry,” explains Harper.

Savings can be made while continuing to use copper cabling, however, as manufacturers develop new products. An example is modular wiring. “The largest benefit of modular wiring systems is the reduction in the labour required on-site. This is one way that clients can offset the price increases,” explains Harper. There has been an uptake of alternative products, particularly for plumbing installations.

Jens Schuell, marketing manager at Uponor International, says: “There is a general tendency in the construction industry [globally] that copper will be replaced by plastic materials.”

The firm’s composite pipes are designed to offer similar benefits to copper pipes. “Our distributors have seen a rising demand for indoor use of multilayer composite pipes for tap water installation, as well as for risers and of pure cross-linked polyethylene pipes also mainly for distribution pipelines in the floors from the risers to the tap,” says Schuell.

Further developments will allow for wider choice for contractors, and perhaps a less risky future when it comes to pricing. “Manufacturers always come up with new innovations and developments in order to make their product much reliable and efficient,” says Azzam.

“Schneider has recently come up with a bimetallic material composed of an aluminum-copper alloy as a core metal, as opposed to the traditional use of copper. In the longer term, low-temperature super-conducting cables will offer a solution of much higher electrical capacity for much less material, but it is years before these reach the mass market in the transmission sector,” says Shaw.

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