Many of our customers ask how metal prices are determined and why they change. While the issue is complicated, below is some information on the larger supply and demand factors that effect the price of metals. Our prices are based on the current spot wholesale rates for large volumes.
Copper Price Determinants
While much copper is mined by developing countries, most copper is consumed by the industrial, developed countries. Thus, copper exports are an important source of foreign exchange for the developing copper-producing counties. Since no single nation has a monopoly on the source or production of copper, copper is a world commodity.
Because copper is a a commercial metal, used particularly by the housing, automotive, and electrical industries, its demand is affected by the general state of the economy and, in particular, by the state of the housing and automotive sectors of the economy. Thus, during recessions or economic slowdowns, the demand for copper declines and its price softens. On the other hand, copper usage typically increases when the economy is strong, and the price of copper, therefore, increases. Copper prices are, thus, fairly volatile over the business cycles.
Increases in the price of copper are , however, limited, particularly when the economy is strong, by competition from substitutes such as steel, plastic, aluminum, and, more recently, fiber optics.
On the supply side, labor negotiations and strikes involving the major copper-producing companies in both the developing and developed countries affect copper supplies and, thus, prices. Copper inventories serve as a buffer and, depending on the level of inventories, can affect prices either positively or negatively. In addition, political or social disruptions, particularly in the developing countries, affect copper supplies and prices. Disruptions in the international transport system may also affect copper prices.
There is an important seasonal in copper prices that relates to the use of copper in housing and automobile production. Copper prices tend to be strong in the early spring due to the purchase of copper by the housing and automobile industries for their peak production levels during late spring and summer. Copper prices, thus, usually reach peaks during the February-April period. After the peak demand during late spring, copper demand declines during the summer, and prices soften during the summer and fall. The strength of the production cycles, particularly those related to housing starts, affects the degree of price increase during the early spring.
Aluminum Price Determinants
Aluminum prices are determined on the basis of the supply and demand factors discussed above. Overall, the supply of aluminum is more broadly based and more economically, as opposed to politically, determined than copper supply. In addition, aluminum’s sources of demand are broader and have smaller seasonal and cyclical influences than copper’s. These considerations tend to make aluminum prices more rationally based and less volatile. However, since aluminum and copper are substitutes in many applications, factors that affect one tend also to affect the other to some extent.
To some extent, as in platinum and palladium pricing, there are three types of pricing in the commercial exchange of aluminum. Traditionally, the first price, the producer price, has been set my major producers of aluminum as a long-run equilibrium price to assure stable prices for producers and consumers. Producer prices are the last to increase in a strong market and the last to decrease in a weak one. These prices for refined output were initiated by oligopolistic producers who controlled production at all levels.
But as the aluminum market has become more competitive and secondary sources of aluminum have become more important, another level of pricing, merchant pricing, has increased in importance. Metal merchants, or dealers, buy aluminum outside the producer market via secondary smelters, independent refiners, and manufacturer inventories. They then sell to mills and manufacturing firms which cannot obtain it from producers at the time. This market has grown in size and importance since the 1970s. Merchant prices are more volatile than producer prices.
A third type of price, the future price, has become important since the introduction of aluminum futures contacts in 1978 and 1983. Futures prices, like merchant prices, are fairly volatile.
Since aluminum smelting is very energy-intensive, energy prices have an important effect on aluminum prices. The availability and cost of capital for all stages of aluminum production and technological advances in the production processes also have important effects. Since developing countries are significant at all stages of the aluminum production process, their political and economic policies affect aluminum prices.
Since aluminum is used in both many consumer applications and many industrial applications, its demand is not as volatile over the business cycle as the demand for metals that have few uses or are used solely for industrial applications.