Ground Zero for Inflation : Rising prices for copper and other commodities trigger apprehension about the direction of the economy
If the next round of inflation is already coming down the road, Roger McDonald is driving it.
Working a 40-hour week and another eight hours of overtime, the friendly, round-faced McDonald sits 10 feet above the ground, maneuvering an obese dump truck up the corniches of the Bingham Canyon open-pit copper mine as he hauls 195 tons of ore in a single load.
The ore is crushed, concentrated, turned into a molten river, refined and ultimately separated into mounds of waste and square sheets of copper, 99.98% pure and worth roughly 70% more today than it was a year ago.
For the workers, the town and the industry, the price spike shouts overtime, retail sales and profits. But across the United States, where consumer prices have been creeping along at only about 3% annual growth rate for four years running, copper’s performance carries insistent whispers of inflation yet to come--not just in the copper market, but through the entire economy.
The finely polished copper, turned out in three-eighths-inch-thick sheets roughly 40 inches on a side, reflects more than the faces of the workers and the dollars they spend at the local Albertson’s supermarket. Copper constitutes a unique economic indicator, as closely watched by Federal Reserve Board Chairman Alan Greenspan in Washington as by McDonald in Utah.
Copper and other industrial metals are “a reflection of what’s going on in the economy, of the inflationary environment,” said J.E. Gross, publisher of the newsletter Copper Journal.
If that is so, then the first link in the inflationary food chain is the pit where copper is emerging from the ground high up in the Oquirrh (pronounced ocher ) Mountains.
Nearly 10 years ago, Kennecott’s copper mine--a yawning hole 2 1/2 miles wide at the mouth that looks as though it might swallow tiny Copperton perched on its edge--was nearly given up for dead. Worldwide copper prices had tumbled, and there seemed little prospect of making money by scraping the copper ore out of the quartz monzonite porphyry into which it had settled in a volcanic eruption roughly 35 million years ago.
Operations at the mine were shut down for nearly two years. The workers were laid off. McDonald, who had spent virtually all his working life here in Bingham Canyon, took to driving a transcontinental tractor-trailer.
But in the past year, copper prices have erupted. At the bottom of a hole gouged half a mile deep into an 8,000-foot-high, snow-covered ridge 18 miles west of Salt Lake City, the ore is once again yielding to blasting sticks and drill rigs and tremendous shovels.
Employment is holding steady at 2,100. Talk of shutting the mine, the largest in the United States, has stopped. McDonald’s truck disgorges ore that, two weeks later, emerges as sheets of finished copper to feed the needs of home-builders, plumbers, auto makers and even the manufacturers of ballpoint pens.
Today those sheets cost $378, or $157 more than they did a year ago.
Copper, said Daniel Edelstein, a mineral commodities specialist at the U.S. Bureau of Mines, “is out there, ahead of the pack, in terms of our general economic outlook. . . . In and of itself, it is not driving inflation or the economy. But it is an indicator of what the economy could be doing” in the near future.
The rise in the price of a pound of copper, from 82 cents a year ago to about $1.490 now, its highest level since 1989, signals that prices for houses, air conditioners and electronics, for example, are also likely to rise.
Unlike the prices of manufactured goods, which reflect the costs of labor and material, raw commodity prices depend only to a small extent on the cost of extracting them from the ground. After that, the law of supply and demand takes over.
Consequently, economists believe that they can get a fairly good reading of future consumer prices by examining the prices of raw commodities--not just copper, but everything from alfalfa to zinc.
Take, for instance, the index assembled by the Knight-Ridder Commodity Research Bureau in Chicago. Over the years, a 10% increase in the index, which measures a wide range of commodity prices, has translated one year later into a 1% rise in consumer prices.
Thanks in part to falling agricultural prices, the index has dropped from 235 a year ago to the current level of 230, and inflation remains under control today.
But now the prices of industrial metals--aluminum, nickel, lead, tin and zinc, as well as copper--have all begun to climb. Lead, which sold at 34 cents a pound a year ago, is fetching 44 cents. Tin has climbed from $3.39 a pound to $4.27; zinc from 48 cents to 59 cents. “Eventually these price increases have to be passed along,” said Robert W. Hafer, director of research for the Knight-Ridder bureau. “So far, they’ve been absorbed by the manufacturers, but that’s not going to last forever. That’s when we start the vicious cycle. When the costs of goods rise, you’ll see a rise in wages, and then you’ve got inflation.”
What perturbs economists is not just the rising cost of these otherwise dull industrial metals but also some other harbingers of inflation.
Unemployment, 5.4% last month, is lower than it has been since August, 1990. That could portend rising wages as employers seek to attract needed workers. Factories are operating at nearly 85% of capacity, the highest level in five years and high enough almost to guarantee rising prices as demand outpaces supply.
Even rising interest rates can be a bad sign. The Federal Reserve Board pushes rates up to dampen inflation by slowing economic activity. But at the same time, rising rates can fuel inflation by increasing the cost of borrowing.
These factors and many others are weighed by the Fed as it tries to keep the economy on an even keel.
But “what are the first places you’d think price pressure would emerge?” asks Daniel E. Sichel, a former Fed economist. “Commodity prices. That’s what we’ve seen, and that’s what the Fed is looking at.”
This is because companies using copper and other industrial metals “are kind of central to what is happening in the rest of the economy,” said Sichel, now at the Brookings Institution in Washington. Manufacturers that pay more for raw materials today will charge consumers more for their products tomorrow.
Already, that inexorable equation is making life difficult for Jon Kantor, 2,000 miles from here in Orange, N.J.
Kantor and his brother run a plumbing supply business that couldn’t be more sensitive to the price of copper. They buy pipe and tubing as well as high-quality finished plumbing products from national manufacturers and sell to plumbers and contractors throughout northern New Jersey. It is not unusual for their suppliers to change prices twice in a week.
One recent job on which Kantor bid involved $20,000 worth of copper needed by one of his customers. “By the time the guy had placed the order, the price had gone up 10%,” Kantor said.
The price of copper is particularly sensitive to coming trends because of the way the metal is used--in housing construction, automobiles, consumer electronics and durable goods such as air conditioners and refrigerators.
One of the most familiar copper items--the penny--is actually 5% copper and 95% zinc, a reversal of its past composition. The price of copper today is high enough that a 95% copper penny would be worth more than one cent.
Like the penny, most manufactured goods that contain copper have only a small amount of the metal. Thus copper’s cost alone does not significantly drive up the price of the finished product.
The price of copper itself is set twice a day, in auctions in London and New York, based largely on expected demand. A growing economy prompts greater consumer spending, which in turn leads to increased demand for finished goods and for the raw materials they require. Therefore, as investors and purchasers anticipate greater demand for copper, they bid up its price.
“A conglomeration of producers, investors, mutual funds, merchants and traders--they’re the ones that assign the price,” said Peter J. Thomas, Kennecott’s vice president in charge of sales. “It has nothing to do with the cost of production.”
The picture is complicated by the fact that copper is a commodity for which there is a worldwide use. The emergence of Europe and Japan from recession will only increase demand; so too will the growing consumer class in China and the construction of communication systems in Asia.
Thomas says Kennecott tried to sell copper for 90 cents a pound when it was fetching only 65 cents on the world market: “It didn’t work.”
Now the price is so high--$1.45 a pound--that Kennecott is concerned that buyers may begin looking for substitutes.
“That price translates into very expensive plumbing tubes, and people say, ‘Let’s just buy plastic.’ The good side is, at $1.40, the copper industry makes a lot of money.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
When economists try to augur trends in prices, many look first at commodities, the basic materials of manufactured goods. Copper is one key indicator of future inflation; broader commodities indexes also provide road signs to the economy.
A dramatic rebound in copper prices...
U.S. market price of copper, in dollars per ton (year-end figures): (1994) $3,083.78
...and a rise in overall commodity prices...
Knight-Ridder commodities index: (1994) 236.64
...add to worries that inflation could take off.
U.S. consumer price index, not seasonally adjusted: (1994) 148.2
* Sources: Knight-Ridder; DataStream
Researched by ADAM S. BAUMAN / Los Angeles Times