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Raw Material Prices Indicate State of Manufacturing

By: Devin Pringle


Date Added : September 5, 2011 Views : 433
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It was only weeks ago that I was writing on the increase in U.S exports from small to medium sized companies, specifically in manufacturing. For our ailing manufacturing sector this seems to be great news but it seems as if this observation has been slightly sidetracked given the recent market performance of raw materials, specifically copper on the Dow Jones.

The price drop comes amidst reports that manufacturers are reporting lower demand for their inventories and so it can be assumed that companies will slow production which ultimately reduces the demand for copper, steel, and other materials. According to the Dow Jones, copper reached a five session low at $4.41 dollars per pound for September delivery, while August dropped 1.6% to $4.40 per pound, just one cent off from September. I don’t really find these numbers that surprising considering that the recession has extended well beyond the United States, while some believe it has been isolated to our borders.

In recent years copper has been the star on the raw materials market next to gold which is on its own playing field. I wouldn’t necessarily say the demand driving it was all here in the United States though. Both India and China have been producing a great deal of electronics that are heavily dependent upon copper. One such example is the influx of cell phones and now table PC’s such as Apple’s iPad. Production is in the millions for all of these devices which have really driven up the price and demand in those regions. It is also important to mention that the rising value of gold can be partially if not solely attributed to growth in electronics. It first came to my attention that copper was on the rise when there seemed to be an increase in copper theft even within the city that I live in. Individuals were stealing piping from construction sites and spools of copper wiring to later turn in for scrap. This is usually one of the first things that I hear about before I even watch the ticker for price fluctuation.

There are always smaller segments of manufacturing that rely heavily on copper alone, such as the heating and cooling industry and those organizations that produce electrical wiring for pretty big industries such as cable and telecommunications. But let’s face it copper is used in almost everything so its applications are wide spread. These organizations will greatly benefit from the price decrease, but all firms are still facing high transportation costs due to the price of crude oil. I can’t leave automotive out of the picture either because believe it or not, they still use copper, not just steel and fiber glass. Hopefully this will offset the financial impact of fuel, but I would guess it would be marginal at best.

The situation is extremely dynamic and there are always a host of variables. What some in the media world aren’t mentioning is that a copper mine in Chile, BHP Billiton’s Escondida has been idle for the last 10 days. Thankfully it isn’t because there are miners trapped; it is because there is a worker strike that has temporarily relinquished their responsibility to make deliveries of copper. This is in fact one of the largest copper mines in the world so a decrease in supply here would in fact have global implications, usually a price increase. The irony here is that the mine has had trouble meeting demand over the last few years and analysts had forecasted yet another short fall this year. The basic principle of supply and demand would generally hold true, but demand in the U.S has dropped. But I would not rely on copper as the litmus paper for American manufacturing. We’re still seeing growth, maybe a hiccup as we often have, but we’re still trending in a positive direction. There is a lot waiting and hesitation in every market due to the solvency issues of the United States government. The actions of the central banks and investment firms rely heavily upon the credit rating of the U.S. On a side note, Apple Inc. was found to have more liquid assets than the U.S treasury which I find pretty alarming. But back to the point that I wanted to make; manufacturing for the most part is very cyclic. Every industry that I have worked in generally has a slower period in the summer time. Moreover, industries such as automotive are going to be pushing their finished cars and trucks in the marketplace during this period. Much of what is going to be produced this year has been completed except for next year’s models in the spring. And because many of the manufacturers in this industry have moved towards a just-in-time or demand pull system, they won’t hold much raw materials in their inventories, and generally along with lean principles, neither will their suppliers. This includes having copper or other raw materials on order. This is all considered in the demand model. We react to weak numbers quickly, but I’m truly an optimist that is holding out. I’ve seen a great deal of optimism in American industries primarily because there has been a great deal of innovation. Innovation is one of those attributes that you look for to see if the optimists have came out of the dark and finally see a light at the end of the tunnel. I think the upfront research and development of the Chevrolet Volt says that the American think tank isn’t going anywhere. New technology that is moving this country forward would never have come to fruition in a country that has thrown in the towel. Copper is down for the time being, but on a global level it will flatten back out and start to rise. And the organizations that I worry about, such as the small and medium size manufacturers on Main Street are seeing a glimmer of hope. E-commerce is becoming more accessible and the ability to diversify has become a little easier, and they are exporting to other countries which helps generate revenue when things here in the United States get a little shaky.




Devin Pringle is the author of this article on cnc turning. Find more information, about cnc milling here

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