R. I. Grant-Suttie
RECENT YEARS have seen extensive development in the study of materials. As knowledge and understanding of the properties of traditional materials expanded, new applications have become possible. New materials have also been developed in response to specific needs created by technological change or as the commercial possibilities of research work were realized. As a result, established uses of materials have been challenged and few materials have been found irreplaceable in their various applications. The challenge to copper has come relatively late and the copper industry is still in the process of adjusting itself to competitive attack.
The encroachment on the market is difficult to assess. In recent years copper production has been expanding steadily; nevertheless the rate of growth would probably have been appreciably faster had substitution not taken place. Once copper has been replaced in a specific application, the process is not easily reversed. A production sequence has probably been adapted to the new material and capital expenditure for retooling and other purposes is usually involved. On occasion low copper prices have prompted fabricators and other industrial users to revert to copper, but this is not frequent. Substitution thus means not only the loss of a market but also the loss of the potential growth offered by that market. Although this evades measurement, the effects of substitution are long term and far reaching.
For those countries, such as Chile, Zambia, and the Democratic Republic of Congo, whose economies have been built round the production and export of copper, and whose development plans are directly linked to copper receipts, technological change presents a threat that is no less insidious for being largely indeterminable. Copper constitutes between 50 and 60 per cent of Congo’s export earnings, between 70 and 80 per cent for Chile, and over 90 per cent for Zambia. The threat of substitution may well become more acute. Copper prices are subject to wide fluctuations; supplies are continually being interrupted; and recently copper has become an expensive material. These factors have undoubtedly reinforced the resolution of consumers to reduce their dependence on it. To what extent substitution will affect the expansion programs which most copper producers are undertaking is impossible to say; nevertheless, it would be imprudent to underestimate the surreptitious erosion that has been taking place in the demand for copper. This is a matter of concern not only to the producing countries themselves but also to those international institutions concerned with balance of payments problems and development, particularly the’ International Monetary Fund and the World Bank.
Incentives to Substitution
Assuming that there is no technical imperative attached to the use of copper, the usual reason for substitution is cost. The high prices that have been a feature of the copper market in recent years have in themselves provided consumers with sufficient incentive either to find cheaper materials or to economize in usage. The volatile behavior of prices is a further deterrent; there have been occasions when the price of copper has virtually doubled in a matter of weeks. This febrile market introduces an element of uncertainty into stockholding, costing, and pricing policies. It becomes difficult if not impossible to determine costs when preparing tenders. If profits are under pressure, especially in the exacting field of international government contracts, margins can be rapidly absorbed if copper prices start rising. Although hedging facilities can be obtained on the principal commodity exchanges, these facilities are limited and cannot always offset the uncertainties.
Uncertainty over supply, whether on account of strikes, political troubles, or other causes, has become a further factor working against the use of copper. With a long supply line between the principal producing areas and consumers in the United States, Europe, and Japan, a disruption to supplies cannot be easily remedied. The constant threat of a shortage and still higher prices prompts precautionary stockholding; this ties up capital and, at a time of rising interest rates and squeezes on credit, may create financial problems. Fluctuations in prices, high prices, high money rates, and unreliable supplies, therefore, have all been factors prompting users of copper to investigate the possibilities of substitution. Producers have become increasingly concerned at the disruption in the market caused by short-term fluctuations in prices; at the same time, they do not like to see prices rise above the “safe” level beyond which substitution may take place. With the depreciation of monetary values this “safe” level has been gradually rising over the past ten years.
Although the consumption of refined copper is concentrated in a relatively limited number of countries, the structure of the market is complex. For a material which is basic to modern industry this is perhaps only to be expected. The chemicals, steel, and aluminum industries are all important consumers of copper, while there are four basic industries which are dependent on copper as their principal raw material: these are brass mills, wire mills, foundries, and powder plants. Each of these industries is engaged in fabricating or processing copper into a wide range of products; for example, brass mills produce sheet, rod and wire, plumbing, and commercial tube. These primary processing industries in turn supply markets which have been broadly classified as building construction, transportation, industrial machinery and equipment, electrical and electronic products, and consumer and general products.
The channel of consumption thus broadens out with the increasing diversity of products with a copper content. However, between the producers and these markets for primary copper lie many intermediaries, such as dealers, stockists, and scrap merchants, who at one moment may be competing with producers and at another are their customers. The producer is thus relegated to supplying a raw material with little or no influence over the end use of his product. Since the end markets for copper are so highly diversified, substitution tends to be piecemeal with the result that producers feel only the cumulative effect of many decisions to use other materials.
The Nature of Substitution
The decision to substitute depends on many factors. The use of materials has become a highly technical field of study and involves specialized forms of cost analysis of the physical and chemical properties of competing substances. Copper rod can be costed out per unit of strength and compared with aluminum alloy or structural steel; again the comparison may be on a conductivity basis. Rigidity, surface behavior, durability, weldability, and, by no means least, bulk, are some of the other properties of competing materials which are usually costed and graded accordingly. The cost differentials between properties of course do not remain constant. A decision to use a particular material in preference to another usually rests not so much on any one property, but rather on a combination of properties. Since copper is a particularly versatile metal, this type of analysis also works to its advantage.
The principal competitor of copper is aluminum. Although the conductivity of aluminum is about 63 per cent that of copper, it is a cheaper material, supplies are readily available, and prices are relatively stable. Competition has been particularly keen in the electricity industry, which has so far provided the largest single market for copper. For example, in the United Kingdom the electricity industry has accounted for some 40 per cent of the total annual consumption of copper, but it is now changing rapidly to aluminum. There has been a particularly marked switch to aluminum in the market for medium-sized cable; in both the lower and the upper voltage ranges, aluminum is also becoming a dangerous competitor. There has been a similar trend in the United States. Despite the additional bulk, aluminum is even being used for windings in transformers and generators.
As technical problems connected with soldering and mechanical strength or cost problems connected with insulation are overcome, the preference for aluminum in electrical applications is likely to continue. However, it is not only in the electrical field that aluminum is giving competition, but also in household accessories, in the building industry, and as a substitute for brass castings. There is a wide range of applications, ranging from hose connectors and nozzles to motor car radiators, where similar performance can be obtained at lower cost; aluminum may even be used for small arms cartridges.
Stainless steel is another metal which has entered markets traditionally held by copper; for example, it is often used in place of copper nickel alloys for marine applications and roofing. The developments that have taken place in the technology of synthetic materials have made plastics an increasingly serious competitor of both aluminum and copper. In the building industry, rigid polyvinyl chloride has been making inroads into the market for roofing, guttering, and piping. Plastic materials are being used in place of copper for pipes and conduits in municipal water purification and reticulation systems. A new field of composite materials, such as PVC-cladded steel or glass fiber epoxy laminates, is now being opened up. These composite materials offer scope for combining qualities, such as strength, anticorrosiveness, and weight. They usually incorporate some synthetic material and can be prepared for special applications almost on a prescription basis.
Even where substitution cannot be made, as in certain copper alloy castings, the high price of copper has prompted greater economy in its use. The motor car industry in both the United States and the United Kingdom has reduced considerably its consumption of copper following the introduction of thinner walls in tubing. More intricate design has helped to reduce copper usage in castings, and new techniques of embedding minibore copper tubing in plastic have reduced usage in heated circuits in buildings. There are many similar instances.
Promoting Copper Usage
The loss of actual markets during the mid-1950’s by copper producers and the realization that potential markets were being neglected led to the formation of two promotional agencies: the International Copper Research Association (INCRA), originally the Copper Products Development Association, and the Conseil International pour le Développement du Cuivre (CIDEC), originally the Copper Producers’ Promotion Committee. At the same time, producers recognized that they had a common interest with fabricators and that they must maintain closer working contacts if this was to be fostered.
INCRA has been operating since 1959 and is largely financed by producers. The Association is primarily concerned with the technical development of copper and new technological applications and processing; it undertakes research, sponsors research projects in outside institutes, and generally coordinates research work of interest to the industry. It has been paying particular attention to investigating new alloys and surface coating. It is prepared to take out patent rights and will allow manufacture under license.
CIDEC is mainly occupied with promoting copper usage and in many ways continues where INCRA’s interests and responsibilities end. Its usual approach is to form a national committee of representative fabricators and users; the committee is then responsible for ensuring that there are close contacts between the various sectors of the copper industry and for drawing attention to developments in copper technology. CIDEC maintains close liaison both with INCRA and the trade associations of the principal industries using copper. It has also helped to improve statistical services.
Although the copper producing countries face difficulties, prospects for the industry are by no means entirely somber. Despite substitution and technological economies in the use of copper, demand has been increasing on the average by some 3 per cent per annum. However, copper producers are usually chary about forecasting consumption; the end product is so widely disseminated and affected by so many variable factors that it is difficult to find a reliable basis for estimating trends. The influences affecting demand are usually of a generalized nature, such as the growth in population, rising standards of living, increasing electrification, new usages of copper, and expanding industrial activity.
For many traditional applications copper remains an indispensable material, while the growing sophistication of industrial processing has led to new applications. New markets are also opening up, such as electronic circuitry, cryogenics, and desalinization. Copper is a particularly versatile metal and its varied properties, such as electrical and thermal conductivity, malleability, ductility, imperviousness to erosion and corrosion, attractive coloring, and, not least, its high scrap value, have led to its widespread use in industry. Indeed, the adaptability of copper and its alloys to manufacturing processing confers special advantage. This adaptability has contributed to many of the recent advances made in fabricating techniques, which include continuous casting, hydrostatic extrusion, and electro-forming.
The alloying properties of copper offer a particularly wide range of applications. With the growing sophistication of foundry work and machining techniques, the metallurgy of brasses, bronzes, and gun metals has provided a fruitful field of research. The construction industry has also been providing new opportunities and copper has once more become a popular roofing material for buildings. As a general tendency, there appears to be a move away from large tonnage usage, which includes the markets for tubing and electrical conductors, toward more specialized applications, where copper’s particular properties, or combination of properties, give it advantage. Indeed, in many ways substitution can be considered as part of a necessary process of discarding wasteful usages of copper as the search for new applications reveals how its special properties can be better employed. However, when copper is competing with rival materials in markets where commercial rather than technical considerations are predominant, then its price performance has become a serious handicap.
Stabilizing the Market
It was during the mid-1950’s that producers began to realize the extent to which they were losing their markets to substitution. Prices rose to unprecedented levels during 1954 and 1955 and it was only when the reaction took place in the following year that producers saw that the end market for copper had contracted. For producers the immediate objective was to stabilize prices at a level where competition could be resisted and where the orderly growth of the industry would be ensured. The various attempts to stabilize the market so far have met with limited success as they have been satisfactory only under certain market conditions. The search still continues for a price basis which producers consider representative of conditions of supply and demand in the industry as a whole.
Two principal methods have so far been employed. The first is the quotation by producers of a fixed price for their contracts independent of the prices on the London Metal Exchange (LME). Since the larger part of the copper produced is sold on contract, a considerable part of the copper market is thus affected. This system of independent contract prices reduces the rate and frequency of increases in contract prices when the free market is rising. On the other hand, the system entails a dual price structure for the same material. Furthermore, too wide a differential between the producer and the LME prices encourages the practice of reselling at the LME price copper bought on contract. Even if the terms of contract forbid resale, fabricators can still obtain the benefit of the differential by using the LME quotations as the basis for pricing their own products. Either way, the producers are losing the advantages of a rising market without achieving their objective of preventing copper prices reaching the substitution zone. A falling market makes it almost impossible for producers to maintain a separate price once the market price has fallen below the producer price.
The system of producer prices has been adopted and subsequently discarded on several occasions. It appears to have worked most successfully when prices have been fluctuating within a relatively narrow range. When copper is in short supply the dual pricing system comes under strain and when there is oversupply the system does not work at all. To cope with the latter situation and to prevent prices falling too low, producers have attempted to restrict output (or curtail supplies to the market) to a certain proportion of capacity. As the market recovers and prices become firmer, production can be resumed. This policy has also achieved a certain success and may well be the only effective method of exerting control over the market during periods of oversupply. There is a school of thought that holds that the copper industry should always be working slightly under capacity if it is to maintain a stable market and that it should be more responsive in adjusting production schedules to changes in market conditions.
Such a policy can also create problems. New productions, planned perhaps five years before, may start supplying the market during a period of curtailment. If the supply position is still to be held, the general curtailment may have to be adjusted to allow for the expansion in capacity, but in making room for new capacity elsewhere a producing country can easily start losing its share of the market. In any event, the success of a curtailment policy must depend on good faith. Curtailment can also impose a financial liability on a producing company as under-utilized capital is serviced or as stocks of concentrates or primary copper are accumulated. Since the major producing countries are all committed to large-scale programs expanding their production and share of the market, agreement over a policy of curtailment may become increasingly difficult to secure.
In addition to these two methods, producers have intervened directly on the London Metal Exchange by buying or selling copper in order to maintain prices at a certain level. However, these open market operations are essentially marginal and can only be effective under certain conditions. They were particularly successful in 1963 when prices hardly deviated from the figure of £234 a ton, but, at that time, a policy of curtailment was also being applied. The financial commitment attached to containing any major movements in prices would probably be beyond the capacity of any single company and perhaps even of any group of companies working in concert.
In the complicated framework of the copper market, it is clear that no single method can be fully effective in stabilizing prices. To stabilize the market a combination of methods seems to be indicated; this means close international cooperation but the organization of a flexible system of market tactics on an international basis raises its own difficulties.
These attempts to control prices were made primarily at the initiative of the producing companies. As the governments of the producing countries have become more articulate in defining their development policies, and as copper prices are the key factor determining the financial resources that are likely to become available for their development plans, the governments have shown increasing interest in the problems attached to copper marketing and pricing. In June 1967, a conference was held in Lusaka between representatives of Chile, Peru, Zambia, and the Democratic Republic of Congo to discuss these and related problems. The principal achievement of the conference was the decision to establish the Conseil Intergouvernemental des Pays Exportateurs de Cuivre (CIPEC), as an agency for communication and coordination between governments, with an office in Paris. While a standing channel of communication betwen governments to harmonize interests and prevent misunderstanding is certainly needed, it is still premature to assess the influence which CIPEC may be able to exert on marketing operations. However, governmental participation in formulating the pricing policies of the producing companies can be expected to increase.
Closely connected with the problem of price stability is the question of continuity of supply. Labor troubles in the producing areas, disruptions to communications, difficulties in obtaining fuel and raw materials, electricity shortages, and political disputes at one time or another have all interfered with and obstructed the supply of copper to the market, on occasion compelling producers to declare force majeure on their contracts. LME prices react quickly, especially when these various factors may be operating simultaneously in different parts of the world. The problem of stabilizing the market is not only a matter of provisioning. In addition to the expansion programs of the traditional producers, many new productions are now being developed elsewhere in the world. The danger of an oversupply position may once more emerge and this would almost certainly be at the cost of price stability; knocking the bottom out of the market could be an expensive way of counteracting substitution.
The Marketing Problem
CIDEC and INCRA furnish the copper industry with the centralized supporting services which other large-scale industries have found indispensable. These services also provide an essential connecting link between producers and consumers, a link which is particularly necessary in view of the diversity of the end markets and the often highly technical applications for which copper is required. Whether these organizations alone are able to exert promotional pressure on a sufficient scale to influence the market is perhaps doubtful. This applies especially during periods of major upheaval. The U.S. strike, the interruption of supplies from Zambia, and the extreme shortage of copper which developed toward the end of 1967 and during the first few months of 1968, appear to have hardened the general trend toward substitution. Exasperation at the behavior of copper prices has been widespread and in these conditions opportunity is created for competing materials.
Copper producers have adopted different attitudes toward the threat of substitution. Some disregard it, confident in the natural growth of the industry; others take the view that substitution has largely run its course; and others see it as a major factor retarding expansion. It is not possible to predict the rate at which substitution will take place, while its action in the market is hard to discern. That does not diminish its influence. If a manufacturer switches to plastic or aluminum tubing in preference to copper tubing, the transfer of business affects not only the supplier of copper tubing but ultimately the supplier of primary copper. The interests of producers are directly involved even though the competitive attack lies outside their immediate market periphery.
In the United States the copper industry has reached a relatively high state of integration. The copper companies are engaged not only in mining and ore recovery operations, smelting and refining, but also in fabricating, alloying, casting, and manufacturing. However, this integration has not been characteristic of the copper industry in other producing areas, and a sharp distinction is usually to be found between the producing and the fabricating sectors. Furthermore, the producing companies supply copper in large quantities to. a relatively small number of customers. Fabricators, for their part, may buy direct from producers and supplement their requirements by marginal purchases on the LME, or they may prefer to buy from merchants, stockists, and other dealers. Between the producer and the consumer there is a highly developed system of intermediary distribution. The marketing network becomes even more complicated for alloys and for manipulated and fabricated copper as the range of products, shapes, sizes, and uses expands. It is in this growing diffusion of markets that substitution has been taking place, piecemeal in manner but cumulative in effect. However, if copper is to withstand inroads into its traditional markets, then effective resistance can only be made at the point of assault.
Price stability and regular delivery are fundamental to any commercial policy and the industry’s failure so far to achieve an orderly market has provided a powerful incentive to substitution. Nevertheless, even if these problems are overcome, it would probably be imprudent to take for granted those markets which are still captive. Technological change presents the industry with a continuing challenge. With the growth of the science of materials, the possibilities of substitution are more likely to increase than diminish; on the other hand, new uses of copper can likewise be expected to open up. However, under the present system of marketing there is a wide gap between the producers and those areas of industry where substitution is taking place.
This structural problem of whether the traditional marketing system is appropriate to withstand downstream competition from substitute materials has to be considered. As with many other commodities, the threat to copper from substitution needs to be viewed in a wider context than that of strict technological preferences or prevailing trading conditions. Indeed, the volatile behavior of copper prices itself could be a symptom of structural maladjustment. Marketing systems and techniques have to be adapted to the growth of an industry and the changing patterns of consumption, and even primary products such as copper can benefit from the new technologies of marketing. If the warning from competitive substitution is to be heeded in time, the current system of distributing primary copper needs reviewing in depth and in detail. Unless the structural divide can somehow be bridged between large-scale producers of copper and relatively small-scale consumers, it is the producer, and those governments who are dependent on the revenue from copper, who are likely to suffer. Substitution has shown that copper is a material which no longer sells itself.