Those who are concerned about the stability of prices for internationally traded commodities will find an excellent case study in the recent behavior of the copper market. World copper prices have undergone violent fluctuation in the 10 past two years due to a concatenation of events affecting both supplier and demand. Prosperity and war have accentuated demand for copper at a time when strikes and political turmoil have impaired production in major copper producing centers and fostered speculative price movements.
In an industry where short-term supply is not easily expanded but short-term demand can be very insistent, it may be impossible to avoid sharp price fluctuations. Purists argue that supply would have responded better and price fluctuations been less had no attempt made to hold down producer prices, especially the extended attempt made in the United States. On the other hand, recent history may be seen as evidence that the long-term health of the industry cannot be left to the vagaries of markets, given the peculiar conditions of the copper market, and that a more determined effort should be made to stabilize price, based on maintenance of adequate buffer stocks. A review of the recent price story may point up these questions more sharply, even though they are not easily resolved.
Historically, in its competition with other materials copper has suffered from a twofold disadvantage: It has tended to become more expensive, and its availability and price have proved unstable. Buyers may be put off quite as much by the undependability of supply and price as by its level. Since product design and tooling are not easily shifted from one material to another, the effect of insufficient supply and high price does not appear immediately in a shift to substitute materials which will ease pressure on the copper market. Rather, such substitution occurs on a longer-term basis in response to past experience and long-term prospects.
Mindful of their customers' attitudes about price, copper producers prompted to stabilize the metal's price after the mid-fifties. Their effort was abetted by the slow growth of demand and over much of this period was pursued by means of posted prices which the producer charged to independent fabricators. Producer prices were an effort to take control of price away from the commodity exchanges, particularly the important London Metal Exchange (LME) , where short-term considerations dominate, and lodge it with the companies, who have more enduring interests in the health of the industry, longer perspective on demand, and the power to adjust supply and capacity over time in accordance with these considerations.
This system began to break down in 1964 under the pressure of rising demand. The whirlwind sprang up quite suddenly. Previous market weakness had occasioned production cutbacks, and producers were sluggish in responding to revived demand. Their belated response then was frustrated in part by strikes, especially in the United States where demand was booming. Imports of metal into the United States quickly communicated the shortage to other markets. As a consequence, the copper available on the LME was bid up in price from the £236 per long ton at the start of 1964 to over £500 by December. At this point release of some of the US stockpile temporarily arrested the rise of the LME price. Throughout this period most copper (at least 80 percent) was being sold at the producer price which had started at the LME level and gone up at a much slower pace, moving in steps over the year to £260 and in the United States from 310 lb. to 340. By early 1965 there appeared fair balance between supply and demand, and belief was expressed that the LME price would decline toward the producer price.
The event proved quite different, however. Prices crept upwards, and by November of 1965 the producer price rose to £304 (= 38 cents per lb.) and the LME price soared over £500. At this point a split developed between the US producer price and that of the European market, with the US price remaining at 36 cents. Continued strong demand characterized by inventory building in Europe and rising consumption in the quick-moving American economy were responsible for higher prices. Underlying forces at work included the general prosperity of the United States, with the added fillip of the Vietnamese war. In addition, the market was nervous about developments affecting African production because of the maneuvering over Rhodesian independence, and, in Chile, severe strikes impaired production.
The US government, seeking to contain inflation developments, has battled price increases for basic industrial materials, copper included. A defense in depth has been attempted. The release of stockpile metal was the most effective weapon employed, buttressed as well by suspension of the tariff, controls over exports, pressure on the Chilean government to hold down the price of metal sold to the United States, and incentives to raise domestic production. Measures of these kinds succeeded in insulating the American market from worldwide influences to some degree. Up to the end of 1966 the US producer price has held steady at 36 cents (with minor exceptions) and the price of copper on the commodity exchange generally has been lower than abroad. Of course, it is uncertain to what degree this price policy has sustained demand for copper in the United States and compelled resort to in-formal non-price means of allocating metal.
In the fall of 1965 Rhodesia proceeded with its unilateral declaration of independence, and Chilean production lost 55,000 tons to strikes. The United States countered these influences by lifting the 1.7 cent duty on imports and releasing 200,000 tons of stockpiled metal. Despite heavy inventory building by European consumers traditionally dependent on African supplies, the price remained in the £500-600 range on the LME into early 1966 with the producer price in Europe moving up to £336 (=42 cents). As the United States tightened its export controls in late January of 1966 and new strikes broke out in Chile, the LME price passed £600 and, restrained in part by a further 200,000-ton release from the US stockpile, remained in that range until April, when it soared toward £800 ( =$1.00 per lb.). The resulting discrepancy between the LME and the European producer price of 42 cents, not to mention the prevailing US level of 36 cents, proved intolerable.
In this climate the Chilean government broke the line, posting a new price of £496 (=62 cents) in April. For a time, then, four prices prevailed in the market, the US domestic price of 36 cents (=£288), the Chilean producer price of £496 (=62 cents), the rest of the world producer price of £336 (=42 cents) and the LME quotation of over £750. As an added complication, the Chileans sold to the United States at a lower price in consideration of US economic assistance. By now price stability, considerably eroded in the upward drift of producer prices for early 1964, was gone and important substitution points—i.e., prices at which larger copper uses become vulnerable to the competition of other materials—were far exceeded except in the United States. Buyers faced not merely uncertainty but virtual chaos. Heavy demand, strikes, the uncertainty about Rhodesia, and Chilean determination to take available short-term gains had fractured the producer effort at stabilization.
In an effort to regain the initiative and halt the wild gyrations of price, Zambian producers soon moved to a price based on the LME quotation. The intention was to force the LME price down, and this result occurred promptly, with the price falling to the £500-600 range in May.
But our melodrama is not finished yet. In late May the political dispute between Zambia and Rhodesia became focused on their jointly operated rail system, and metal shipments were impaired, forcing the price again over £600 on occasion. European buyers, whether discouraged by the price or content with their inventories, did not respond strongly to the new crisis, and it simmered down by July. Nonetheless, the Chileans, still pursuing what seemed to be a strategy of maximizing short-term gain, raised their price in July to £560 (=70 cents). Much to their consternation, the LME price declined in late July and August so that by mid-August the Chileans gave up and turned to a price based on the LME, by now in the low £400 range and even falling lower in late August and September. Recovery since then has been modest.
The big excitement was gone from the copper market. Labor problems in Chile and Africa seemed under control. Strong US demand supported the market, abetted by the continued availability of low-price copper in the United States. By late 1966 it was apparent that world market influences were being communicated more effectively to the US market which was beginning to feel heavy upward pressure. The mutual distrust of Zambia and Rhodesia continues to impair output in that area, buy European buyers appear to be running down their inventories, and supplies seem adequate at the present price level. Moreover, buyers are aware of the stimulus which recent prices have had on exploration and development. While output has not responded promptly to the recent price levels, expansion already in progress will soon bring in added capacity. In fact, one can begin to discern some doubt that demand will be adequate for the 50 percent or better increase in capacity anticipated by some for the early seventies.
Copper producers are anxious to restore their image as dependable suppliers. Over the longer term it seems likely that copper will be in ample supply as arrangements are made to provide alternative transportation for Zambian output, US and Chilean expansion projects come to fruition, and the US economy decelerates. Moreover, it appears certain that current prices are well above those required to insure sufficient output to meet future needs. The longer-term prognosis for copper prices surely must be lower, at least outside of the United States. But many copper users will not soon forget their roller-coaster ride of the past two years and the airy feeling they retain at present levels. In view of copper significance for the economies of several producing countries and its importance as an industrial input and defense material for industrialized countries, it seems quite likely that renewed efforts will be made by the producers and some of the governments involved to stabilize once once the current supply situation has eased.
