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Resesurdh Bep&irtnMimtb August 23,1974 The American public has been hoarding pennies in recent months in the expectation that the price of copper would rise above $1.51 per pound, making the metal value of the coin greater than its face value. Many people also have been hoarding because of a belief that the Lincoln copper penny would be come a prized numismatic item, in view of the Treasury's proposal for changing the metallic composition of the coin. However, the public apparently has overlooked the fact that prices have declined sharply following the 1973early 1974 upsurge in free-market copper prices. The price of copper on the London Metal Exchange— the freely fluctuating quotation upon which foreign producers base their selling price— has plunged during the last several months from a record $1.52 per pound to less than the 85-cent price currently quoted by domestic producers. That decline has occurred in the face of supply interruptions caused by a month-long strike in the U.S. copper industry. Demand versus supply The Treasury's decision to seek Congressional authorization for changing the copper content of the one-cent coin was motivated by last year's unprecedented upsurge in world prices. The demand for copper rose sharply in 1973 as the industrialized nations of the world experienced their strongest expan sion in economic activity since the Korean War. As a result, deliveries 1 Digitized for FR A SER of refined copper to fabricators throughout the non-Communist world rose by 9 percent— or twice the annual rate of gain during the prior decade. Speculators mean while bid feverishly for copper on the commodity exchanges as they sought protection against world wide inflation and depreciating currencies. In the face of this upsurge in demand, world production rose by only 1 percent last year, as labor disputes, equipment breakdowns and political upheavals adversely affected output. The copper industry had long been subject to frequent interruptions in supply, since many of the world's largest mines are located in politically unstable coun tries. The United States and Canada, the two largest producers in the non-Communist world, account for about one-half of total mine pro duction, but another one-third is produced in Chile, Zambia, Zaire (Congo) and Peru, where political upheavals and changes in mine ownership have held the growth of output in recent years below targeted levels. By early 1974, all four of these countries had taken over full or partial ownership of the copper properties located within their boundaries. Even with the industry's long his tory of instability, an inordinately large number of "forces majeures" — noncontrollable cutbacks in ship ments— occurred last year. In Zambia, a border dispute with Rhodesia delayed exports of metal (continued on page 2) Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. as well as imports of copper-pro ducing equipment. In Chile, work ers struck the El Teniente mine for 77 days, resulting in production losses of nearly 75,000 tons, and the internal political discord which culminated in the September coup d'etat disrupted production even further. In the U.S. and Canada, fur nace breakdowns and the difficulties of installing pollution-control equipment resulted in a rash of force majeures by major producers. The gap between refinery produc tion and shipments was filled by a sharp reduction in inventories.held. by producers, fabricators and metals exchanges. Initial price surge The outcome of this tight supply situation was a doubling of world copper prices over the course of the year, with the London price soaring from 51 cents to $1.01 per pound. The Cost of Living Council per mitted domestic producers to raise their price 17 percent (to 60 cents a pound) by March 1973, but a wide gap later developed between the soaring world price and the domes tic ceiling price, leading to a heavy outflow of U.S. metal to higher-priced overseas markets. Another (December) increase in the U.S. price, to 68 cents a pound, did little to stem the outflow. The Treasury thereupon asked Con gress for authority to change the one-cent piece from 95 percent copper and 5 percent zinc to a 96percent aluminum alloy. The freemarket (London) price at that point was $1.11 per pound, and the 2 Digitized for FR A SER Treasury feared that it might soon reach $1.20 per pound— at which price the cost of producing the penny, including material and labor, would exceed the face value of the coin. For that matter, at a $1.51 price, the metal content alone would equal the face value, stimulating the hoarding of coins for melting. Downward spiral Two important developments later obviated the need for a new coin age. First, Congress passed legisla tion last December authorizing the sale of copper from the national stockpile. The Mint then purchased 30,000 tons from this source at 75 cents per pound, and last month bought another 5,000 tons from dealers at 89 cents per pound, to meet its copper-penny require ments through the rest of this year. More importantly, world copper prices have declined sharply from the $1.52 peak reached in April, when the speculative bubble asso ciated with the Arab oil embargo was at its worst. The quotation sub sequently plunged almost without interruption to a present level of 82 cents per pound— below the pre vailing U.S. producer price of 85 cents— and undoubtedly would have fallen even further but for this summer's strike in the U.S. The decline was triggered by a heavy speculative sell-off, attribut able to rising interest costs on inventory and (especially) to a fundamental improvement in the overseas supply-demand situation. Copper production outside this country ran 15 percent above the year-ago level during the first six months of this year, and since de liveries to fabricators rose by only 1 percent, inventories jumped 45 percent above their year-earlier mark. For this reason, prices on the exchanges are likely to continue downward now that the U.S. strike has been settled, despite the tight supply situation in this country caused by persistent equipment problems and the end of stockpile sales. Moreover, the huge increase in worldwide primary capacity scheduled to come on stream during the 1974-78 period suggests the absence of significant price pressures for several years to come. The evidence thus indicates that the Mint will be able to purchase all the copper it needs to meet its 1975 penny production require ments for less than $1.00 per pound and, in addition, will have little difficulty in meeting its later needs. The Mint plans to purchase 20,000 tons from dealers this month on a sealed-bid basis in an attempt to satisfy the bulk of its 1975 coin age requirements. Even if copper prices were to rise above the $1.51 per pound "melting point" and the composition of the penny had to be changed, it is not at all certain that the new coin would be an aluminum alloy. Ad mittedly, aluminum is durable, widely available, and easy to fabri cate, and its light weight assures that the metal cost of the penny would remain significantly lower than its face value for a long time to come. Approximately 500 pen nies can be produced from a pound 3 Digitized for FR A SER of aluminum, compared with 150 for copper. But because of the oper ating problems that aluminum pen nies would cause for the vendingmachine industry, it is unlikely that Congress will authorize such a shift. In June, the House Banking Com mittee approved a measure that would authorize the Treasury to reduce the copper content of the penny to 70 percent if necessary, but it rejected the use of an alumi num alloy. l ------------3 Meager return The introduction of a new coin would not necessarily endow the present Lincoln penny with numis matic value. The Mint has produced over 62 billion Lincoln pennies of identical design during the last 15 years, so the coin does not have the characteristic of rarity required in establishing value for any col lectible item. Currently the Mint is producing 35 million every day—* almost twice as many as a year ago. Moreover, because of the miniscule amount of metal in each coin, a collector would have to acquire an enormous number of pennies to earn even a modest return. For example, even at a price of $1.57 per pound, a person would have to collect 240,000 pennies— with cop per content of 1,600 pounds—to earn only $100 more than the $2,400 face value. Furthermore, out of that $100, storage, transportation and brokerage costs would have to be deducted. And melting could not occur at all unless the Administra tion lifted the present ban against melting or treating of coins. Yvonne Levy ®/2 ) o u=3 uoi8umse/v\ • MBjfi • uoSaJO • BpeAaN . oi|epi MBMBH . eiuJO|!|B3 • euozuy • e>|SE|v ^UH®mpTBdl©Q[ ISpjnB ®8®^[ BANKING DATA— TW ELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Selected Assets and Liabilities Large Commercial Banks Amount Outstanding 8/7/74 Change from 7/31/74 Change from year ago Dollar Percent + + + + + + + + + + + + +8,653 + 7,760 - 490 + 3,082 + 2,695 + 750 - 188 + 1,081 + 7,261 + 1,311 + 99 + 5,992 67 + 5,991 - 312 + 3,926 417 212 110 73 25 2 200 5 296 651 46 51 11 185 214 122 Loans (gross) adjusted and investments* Loans gross adjusted— Securities loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities Other Securities Deposits (less cash items)— total* Demand deposits adjusted U.S. Government deposits Time deposits— total* Savings Other time I.P.C. State and political subdivisions (Large negotiable CD's) 84,461 66,370 1,712 23,494 19,677 9,425 5,059 13,032 79,419 22,679 401 55,286 17,804 28,339 5,960 15,138 Weekly Averages of Daily Figures Week ended 8/7/74 Week ended 7/31/74 Comparable year-ago period 86 181 95 40 477 437 68 239 -1 7 1 + 1,417 + 1,857 + 109 + + + 266 Member Bank Reserve Position Excess Reserves Borrowings Net free (+ ) / Net borrowed (—) Federal Funds— Seven Large Banks Interbank Federal funds transactions Net purchases (+ ) / Net sales ( - ) Transactions: U.S. securities dealers Net loans (+ ) / Net borrowings (—) - 480 - 399 + + + + + + + + + + + + 11.41 13.24 22.25 15.10 15.87 8.65 3.58 9.05 10.06 6.14 32.78 12.16 0.37 26.81 4.97 35.02 *Includes items not shown separately. Information on this and other publications can be obtained by calling or writing the Administrative Services Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco, California 94120. Phone (415) 397-1137. 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