Price volatility in the copper market is forcing electrical and plumbing contractors to rethink their bidding procedures for construction projects. “I think contractors are just feeling the pressure. Prices are at an all-time high,” says John Mothersole, senior economist for Global Insight in Washington D.C.
Average copper prices are at about $2.25 to $2.30 per lb. Mothersole says that compares to an average price for all of 2005 of $1.68 per lb. In 2004, the average price was $1.29 and in 2003 it was as low as 81¢ per lb, he adds.
The Bureau of Labor Statistics producer price index for copper water tubing in January showed a 40% annual increase. ENR’s 20-city average price for copper water tubing is up 35%.
“We’ve had a huge influx of speculative interest,” Mothersole says. This has led to some physical tightness in the market, but so far no extreme delays in delivery times. “I know backlogs are stretched out for various copper products,” he says.
The biggest impact on contractors is the volatility in the price of copper products, says Mark Shortino, vice president of Radec Corp., an industrial and commercial electrical contractor in Rochester, N.Y. “Our vendors are quoting prices that are good for only a matter of hours,” he adds. “It is very difficult to forecast where your costs are going to go. It makes it extremely difficult for us and our customers to budget the costs of the project,” says Shortino.
Shortino has found it hard to put escalator clauses in contracts, which call for an increase in price in the event of an increase in a certain cost. “The customers are still looking for everything to be very competitively bid,” Shortino says. “If they see any kind of a bump in the cost of construction, it could cause the whole project to be at risk.”
Radec purchased a larger amount than usual of copper products to hedge against price hikes. “But the run-up has been going on for a long enough period those advantages have disappeared,” Shortino says. As a result, the company has been pushing aluminum conductors instead of copper. Shortino says a lot of his customers are willing to use aluminum conductors now because the cost savings are becoming significant.
Not everyone wants to use alternative products. “I’m a firm believer in copper,” says Jim Steinle, president of Atomic Plumbing & Drain Cleaning Inc., Virginia Beach, Va. He tries to pass the cost along to customers but that can be difficult for larger build-out projects with general contractors usually wanting to hold the price for at least 90 days.
Mothersole also expects that copper prices might rise in the near term. But he expects prices to fall slowly back over the course of the year. He cites weak consumption growth globally, which he says is a function of the higher copper prices. “Inventories are very low and the market is tight. There really is a physical scarcity of material and that, by itself, has helped to restrain consumption,” he says.
This is providing an incentive on the supply-side of the copper industry to increase production. “Our expectation is that markets will be moving to a balance over the course of the next four to six quarters,” Mothersole says. He predicts that the average price of copper will be below $2 per lb for all of 2006.
(Photo by Michael Goodman for ENR)