Copper Producers: A Firm Hold on the Industry?

January/February 1989

North American copper producers, once fair game for merchants and traders, are reestablishing market dominance. Industry rationalization plus marketing and technical innovations have diminished the role of the merchant/trader. Here's how this phenomenon came about--and what may be in store for copper producers and consumers alike.

By Frederick D’'Agostino

Frederick D’'Agostino is vice president of Warrenton Refining Company, Inc., New Canaan, Connecticut.

Last September, this headline appeared on the front page of American Metal Market: "Cargill to Abandon Nonferrous Trade." It referred to an announcement by Cargill Metals, Minneapolis, reportedly the world's largest commodities trader, that it was shutting down its worldwide nonferrous trading operation. In the last decade more than 20 major trading companies have abandoned the copper business. Some were the "old guard," firms that had been major players for many years, such as ACLI, Ametalco, Associated Metals, Continental Grain, Erlanger, Metal Traders. Other firms, though younger, nevertheless represented important segments of the industry: Canadian-American, Geominerals, Intramet, Lissner, Metric Metals, Samincorp, St. Joe Minerals, Transworld. Still others, like Cargill, have continued to function but without a copper trading department: Exxon Minerals, General Motors, WR. Grace, Lloyd's Bank, Merrill Lynch, Morgan Stanley.

Many firms that have survived, such as Bomar/Berisford and Primary/Asoma/Minimet, have done so only through consolidation and tremendous shrinkage. In the early 1970s, International Minerals & Metals joined Brandeis, Goldschmidt & Co. Ten years later, Brandeis merged with the Intsel Corporation and a few years after that Brandeis/Intsel became a wholly-owned subsidiary of Pechiney, a quasi-governmental French metals producer. Even the largest copper merchant, Philipp Bros., has survived only by closing down offices around the world as well as closing (or losing) entire departments (as in the recent defection of most of its nonferrous scrap department). This process of shrinkage, disappearance, and consolidation is what the British call rationalization."

Why the Shutdowns and Shrinkages?

As the profit margins of the North American copper producers were squeezed by lower-cost imports during the 1960s and early 1970s, so the merchants have been squeezed during the late 1970s and 1980s. Twelve years ago, in a speech before the First American Copper Council Hedging Seminar, a well-known copper trader boasted that the best thing for the merchant business had been the invention of the U.S. producer price. By maintaining a relatively inflexible price, which was often totally divorced from the world market, the producers had allowed the merchants more than ample profit margins with relatively little risk.

Since then, by offering Commodity-Exchange-related pricing terms and favorable payment conditions, and especially by maintaining a producer price that is far more market sensitive, North American producers have successfully increased market share at the expense of the merchant community. There is every reason to expect this evolution to continue.

In addition to their own aggressiveness, the producers have been aided and abetted in their quest for greater market share by technological change--namely, the demise of the hot rolling mill and the rise of its successor, the continuous-cast rod mill. On the East Coast alone, almost a dozen wire-bar rolling mills have closed in the last 10 years, including Anaconda/Hastings, Cerro/ Hicksville, General Cable/Perth Amboy, General Cable/Rome, Hatfield Wire, Narragansett Wire, Phelps Dodge/Bayway, Rome Cable, and Triangle Wire. Most of these mills were independently owned and welcomed merchant wire bar, either as "free" inventory or as toll metal for conversion into rod for consumers considered too small for direct sales by the producers.

These mills have all been replaced by continuous cast mills that, with only a few exceptions, are owned and operated by the producers. Furthermore, these producer-owned mills now prohibit tolling using merchant-supplied cathode, except for the few consumers who have been "grandfathered." As a result, producers have gained an even stronger grip on the domestic rod and cathode market.

While the changes that have occurred during the past 10 years have been dramatic, the groundwork for them was laid in the 1950s and 1960s with the rise of nationalism in Africa and South America. As the producers of Great Britain and Belgium lost their holdings in the African copper belt to the newly emerging countries of Zambia and Zaire, so the U.S. producers lost their properties in South America to Chile and Peru. In response to the loss of these assets as well as to the squeeze engendered by these countries' overproduction, several producers felt compelled to turn to the oil companies for survival: Duval to Cities Service, Anaconda to ARCO, Kennecott to British Petroleum. Of these three, only Kennecott survives today. Other producers disappeared through merger such as Miami Copper, Bagdad Copper, Inspiration Copper. Still others simply closed down entirely such as Amax, Copper Range, Quincy Mining.

How High Is Up?

The implications for the copper consumer of these tremendous shifts in the structure of the industry are far from favorable. On both the Commodity Exchange and the London Metal Exchange the absence of many merchant traders has led to a thinner and far more volatile market. This increased volatility has driven many smaller speculators out of the market and kept them out, further decreasing volume and increasing volatility.

On the physical side, fewer merchants mean fewer stockholders as well as lower total merchant stocks. While this may seem academic in a backwardation environment, where zero inventory is the goal of everyone, the fact remains that ultimately--probably sometime this year--the contango market will return to copper. When it does, there will be fewer merchants to capitalize on the self-financing nature of holding inventory in a contango. As a result, there will be fewer stocks available to act as a safety valve to relieve temporary dislocations due to strikes, equipment malfunctions, and market misjudgments. Volatility, this time in the physical sphere, is bound to increase.

Another implication for the copper consumer is perhaps the most obvious one: fewer merchants = less competition. Producers are offering a certain amount of flexibility in pricing and payment options and are keeping producer prices in line with the spot market (and why not when the price is $1.45 a pound), but what will happen in a year or two if the market price falls dramatically and the competition to keep the producers in line is no longer around? It is easy to visualize the situation in the not-too-distant future where, once again, the producer price is totally divorced from the world market, and the relationship between producers and merchants comes full circle.