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August 13, 1982
Copper in the Red
The first half of 1982 proved to be even more
painful for the U.S. copper industry than the
disastrous year of 1981. Severe cutbacks in
mine production left refineries operating at
only 55 percent of capacity but were not
enough to stem downward pressure on
domestic producer prices for refined copper.
By June of this year, major
copper producers had actually been operating in the red
for more than six months.
u.s.
The weakness in the copper industry lies in
the combination of a slump in worldwide
demand for refined copper and excessive
worldwide production. Major final users of
copper products such as the construction and
transportation equipment industries have reduced their purchase orders but foreign producers have failed to cut back primary output.
Fleeting rally
There was an apparent rally in copper prices
on the New York and London commodity
exchanges in July of this year but it proved to
be the result of temporary speculative buying
rather than any fundamental improvement in
the demand for copper.
Earlier, in June, speculators reacted to high
U.S. interest rates and declining inflation by
engaging in a massive copper sell-off. The
resulting decline in quotations on the exchanges-to 59 cents per pound-forced
domestic producers to lower their prices to a
range of 66-68 cents per pound. By July, the
latest round of production cutbacks and a
drop in interest rates had encouraged speculators to bid prices up slightly. The increase
was nevertheless sufficient to enable U.S.
producers to boost their prices to the range of
72-74 cents per pound. This higher range,
currently in effect, is down about 50 percent
from the all-time high of $1.45 per pound in
early 1980 and far below the breakeven
point, estimated at 85 cents to $1.00 per
pound, for most firms.
By the early part of this month, exchange
prices for copper were once again weakening. It appears doubtful that any price advance can be sustained until the economy
improves significantly enough to correct the
fundamental supply-demand problem. In the
meantime, production curtailments are adversely affecting copper mining communities
in Arizona (which traditionally account for
over two-thirds of the nation's output), Utah
and New Mexico.
Worldwide surplus
Copper demand has always been subject to
cyclical volatility and its behavior during
the 1980-82 recessionary period has been
no exception. Demand for refined copper
throughout the non-Communist world
began to decline in 1980, after a strong first
quarter. Worldwide deliveries dropped by
nearly 7 percent that year, with most of the
decline occurring in the U.S. market. In the
United States, all major final user groups
reduced their consumption-the construction, electrical, industrial machinery and
equipment, transportation equipment and
consumer goods industries. In July of the
same year, the domestic industry was shut
down by an industry-wide strike that lasted
as long as five months at some faci Iities, but
annual worldwide demand was so depressed that supplies available from refineries
and the commodity exchanges were sufficient to meet demand with only a modest
reduction in inventories.
In 1981, deliveries of refined copper
throughout the non-Communist world fell
by another 1 percent. In the United States,
del iveries rebou nded somewhat, due to the
resumption of normal production, but still
remained well below the 1979 peak. Elsewhere, demand fell substantially due to the
slowdown in foreign economies. By midyear, worldwide inventories of refined copper began to grow excessive. As a result,
U.S. producers announced extensive sum-
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Opinions expressed in this newsletter do not
necessarilv reflect the vievvs of the
of thc' Federal Reset"ve Ban k of San Francisco,
or of the Board 01 Covernors of thp Federal
Reserve Svstem"
cutbacks. In fact, representatives from both
Chile and Peru labelled production cutbacks
"impractical'.' due to their nations' needs to
meet certain export quotas to satisfy International Monetary Fund loan commitments.
Chile, the second largest copper producer in
the non-Communist world after the topranking United States, still plans to increase
mine production 4 percent in 1 982. Without
production cutbacks, these and other actions
by the association to prop up prices in the
face of weak consumption are likely to prove
ineffective.
mer and Christmas holiday shut-downs of
mines and smelters in an effort to work off
excess inventories. StiII, by the end of 1 981 ,
refined stocks at domestic and foreign refineries and in commodity exchange warehouses had risen 6 percent to 771 ,000 tons.
Inventory accumulation has continued into
1 982. According to industry sources, stocks
have risen to an estimated level of around
900,000 tons, about 30 percent higher than
the low of 693,000 tons in May of 1 981 .
This build-up has occurred despite drastic
cutbacks in U.s. mine and refinery production. Around mid-April, the nation's second
largest producer shut down all of its copper
mines and three of its four smelters. Those
facilities remain closed. By June, that action
and others helped reduce domestic mine
production to a level 37 percent below the
level of a year ago.
Falling prices
In the face of these weak market conditions,
U.S. producer prices for refined copper have
moved downward almost without interruption. Producers raised their nominal prices
slightly in July but since 1970, the producer
price for copper has declined about 48 percent in real (constant dollar) terms. In fact, in
real terms, the price at the June low was the
lowest price since the late 1940s.
More curtailments have since been announced. In early July, the nation's leading
copper producer stated that it will put its
division at Hayden, Arizona on a "care and
maintenance" basis for an indefinite period
beginningAugust 15. The workforce will be
reduced from 640 to 200 employees. The
company also said itwililay off another 91 0
workers at its Utah division to bring the total
layoffs so far this year at that facility to
almost 2,000.
On July 1, when the price of copper on the
commodity exchanges had dropped far
below U.S. producer prices, the nation's
leading producer announced that itwould no
longer tie its selling price directly to the
Comex (New York Commodity Exchange)
quotation plus a delivery charge. Instead, the
firm would revert to its traditional pre-1 978
practice of posting price changes on a less
frequent basis through an announcement
process. This action reflected the company's
unwillingness to bring its price closer into line
with the extremely low exchange quotation.
Unfortunately for domestic producers, the
continued increase in mine production elsewhere in the non-Communist world has offset
some of the domestic cutback. Major exporting nations such as Chile and Zaire, in an
effort to maximize foreign exchange earnings
from their government-owned properties,
have continued to expand production.
Despite this change in the pricing formula,
efforts by domestic producers to hold their
prices above prices on world commodity exchanges cannot succeed for long. Copper is
an internationally-traded commodity whose
price is established in world markets. Since
the United States is a net importer of copper,
domestic producers must price their material
to meet foreign competition or face increased
inroads into domestic markets. Thus, there
The Intergovernmental Council of Copper
Exporting Countries-the international
association of foreign producers-agreed in
their meeting on July 1 2-1 3 in Lima to limited
interventioFl in the commodity exchange
markets but not to support actual production
2
MONETARY POLICY OBJECTIVES
Federal Reserve Chairman Paul Volcker presented a report on "Monetary Policy Objectives
for 1 982" at the July 20 meeting ofthe House and Senate Banking Committees. The report
includes a summary of the Federal Reserve's monetary-policy plans for 1982-83, along with
a review of economic and financial developments this year to date. Single or multiple copies
of the report can be obtained upon request from the Public Information Department, Federal
Reserve Bank of San Francisco, P.O. Box 7702, San Francisco CA 94120. Phone (415)
544-21 84.
must be a close correspondence among all
copper prices throughout the world, after an
allowance for delivery charges.
products remained extremely depressed and
served eventually to cool speculative buying
interests.
In the last two weeks, world commodity exchange prices have dropped once again, and
now exert fu rther downward pressure on
domestic producer quotations.
The fleeting rally in the commodity exchanges only proved the ru Ie that actual consumption must rise sufficiently to deplete producer inventories before copper prices can
rise permanently. Speculation alone cannot
sustain a price increase.
Sustainedupturn?
The July increase in commodity exchange
prices was triggered by such factors as increased buying byChina, bidding by the U.S.
Mint, and market intervention by foreign producers. Mostly, it reflected speculative buying triggered by lower U.s. interest rates
which both reduced the costs of holding inventory and fostered expectations of futu re
improvement in U.S. economic activity. The
fundamental worldwide demand for copper
Given the sluggish nature ofthe recovery
expected in the U.S. economy during the
second half of this year, any significant recovery in copper prices probably will not
occur untril1 983. At the same time, the depressed prices of other metals such as lead
and zinc produced in association with copper add to the industry's problems.
Yvonne levy
u.s.PRODUCER COPPER
Cents/ Pound
PRICES
1 40
120
1 00
Nominal
80
60
40
20
o
1970
1972
1974
1976
3
1978
1 980
1 982
monthly
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Jd
BANKINGDATA-lWElFTH FEDERAL
RESERVE
DISTRICT
(Dollaramounts millions)
in
Selected
Assets nd Liabilities
a
Large
Commercial
Banb
Loans
(gross,
adjusted) investments*
and
Loans
(gross,
adjusted) total#
Commercial industrial
and
Real
estate
Loans individuals
to
Securities
loans
U.s.Treasury
securities*
Othersecurities*
Demand
deposits total#
Demand
deposits adjusted
Savings
deposits total
Timedeposits total#
Individuals, & corp.
part.
(Large
negotiable
CD's)
WeeklyAverages
of Daily Figures
MemberBankReserve
Position
Excess
Reserves )/Deficiency )
(+
(Borrowings
Netfreereserves )/Netborrowed )
(+
(-
Amount
Outstanding
Change
from
7/28/82
160,315
140,365
44,257
57,146
23,452
2,764
6,346
13,604
38,078
27,282
30,314
99,344
89,708
37,692
7/21/82
38
+ 323
+ 232
+ 45
+ 57
+ 38
284
77
- 745
+ 451
191
+ 105
+ 59
148
Weekended
Change
from
yearago
Dollar
Percent
10,092
11,355
5,470
3,464
547
1,402
114
1,377
1,143
277
376
15,558
14,332
3,685
Weekended
7/28/82
7/21/82
56
25
31
10
7
3
6.7
8.8
14.1
6.5
2.4
102.9
1.8
9.2
2.9
1.0
1.3
18.6
19.0
10.8
Comparable
year-ago
period
75
105
30
* Excludes
trading
account
securities.
# Includes
items shown
not
separately.
Editorial
comments beaddressed theeditor(WilliamBurke) to the author••.. Free
may
to
or
copies this
of
andotherFederal
Reserve
publications beobtained calling writingthePublic
can
by
or
Infonnation
Section,
Federal
Reserve
Bank SanFrancisco, Box7702,SanFrancisco
of
P.O.
94120.Phone
(415)544-2184.
@FedFRASER