Copper price increase adds to supply worry

Four-month high for metal a big concern for Gulf cable makers.

Contracts for the future purchase of copper rose to a four-month high yesterday as worries intensified about a supply deficit that could hurt Gulf cable makers. A contract for December delivery on the Comex, a commodities exchange in New York, touched US$3.46 a pound - its highest level since April 27 - before falling off slightly.

Blame it on last week's report that showed the economy in the US grew faster than forecast in the second quarter, or on a general commodities rally. There is sound reason for the copper rally beyond speculation about the economy. A report by the International Copper Study Group published last week showed a production deficit of 190,000 tonnes. And by the end of last month, copper stocks held at the major metals exchanges were 11.4 per cent lower compared with the same period last year. Compared with June levels, inventory was down at all three exchanges.

Is a further increase in copper prices expected? "Yes, on the back of where we are on the growth cycle in emerging markets, we're not over the peak at all," said Omar Taha, an analyst at Beltone Investment Bank in Egypt. For the region, higher copper prices mean electric cable companies are likely to feel some pain. Copper is used extensively in cable and forms the core of electrical wires. "A rise in copper prices combined with an inability to increase their gross profit per tonne is not the best thing in the world for them," said Mr Taha.

With five cable companies listed in the region, from Oman Cables to Elsewedy Cables in Egypt, competition in the industry is strong. That has already squeezed profit margins, a condition that will not be helped by recent increases in the copper price. "If copper moves up, higher selling prices with stable gross profit per tonne will squeeze margins, require higher working capital and add further strain on their cash flows," Mr Taha said.