Japan: Copper price dynamics, strategic shifts in wire manufacturing

• Manufacturers face risks from volatile copper prices, driving urgent reforms
  
  
• Stricter guidelines on quantities, delivery dates stabilise supply chains
  
  

The significant volatility in copper prices is posing substantial loss risks for wire manufacturers, creating a growing push for trading system reforms. Copper is the main material for construction wires, which constitute about half of the domestic copper wire market, making these wires directly linked to copper prices.

However, copper price fluctuations in long-term delivery transactions and inventory sales, known as futures contracts, pose significant risks. A major company executive stated, "If we don't change the contract form, we won't be able to continue our business," prompting moves to introduce a new, significantly overhauled trading system.

Additionally, for equipment wires, where the selling price is not linked to copper prices, the rise in copper costs directly affects profits due to increased material expenses.

The owner of a wire manufacturing company expressed astonishment at copper price levels, which surged from JPY 870,000/t ($5,402/t) in January 2021 to about JPY 1.58 million ($9,817/t) last month. This long-term uptrend is marked by more significant short-term fluctuations.

Managing risk, stability:

Electrical contractors using futures contracts face significant loss risks from copper price volatility in construction wires. These contracts, signed for each building project, require delivery over extended periods with fixed procurement costs based on the initial copper price. Customer requests for changes in delivery amount and timing amid fluctuating prices can lead to substantial losses for wire manufacturers.

In response to volatile copper prices and increased expected losses, industry stakeholders view the situation as critical. A major company plans to implement significant reforms over the next two years, introducing stricter guidelines on quantities and delivery dates at order placement to mitigate risks and ensure a more stable supply chain.

Another major executive emphasised the need for stricter controls over quantities and delivery dates at the contract stage, reflecting industry-wide desires for stability and reliability in the supply chain. There is growing support for a contract system that ensures adherence to agreed-upon quantities, emphasising consistency and predictability in production.

Adapting to copper price volatility:

Copper price fluctuations pose significant risks in inventory sales. A major executive highlighted concerns over potential sharp declines, where inventory might be sold below production costs. Some companies are considering raising inventory sales prices by about 20% to mitigate these risks and maintain profitability amid volatile market conditions.

Moreover, there's a consensus among stakeholders that the entire supply chain, including distributors and contractors, should collectively manage and absorb the impacts of copper price risks. This collaborative effort aims to distribute the burden more equitably across industry players, ensuring resilience against market uncertainties.

In response to challenges, wire manufacturers are pushing to expand trading systems linking selling prices to copper prices. Sector leaders stress the impact of rising copper costs on profit margins. Negotiations are underway to adopt dynamic pricing methods, with some manufacturers successfully implementing these changes. Future plans aim to strengthen this trend, enhancing financial stability and adaptability in the industry.

Managing copper price volatility:

The head of another equipment wire manufacturer reflects on past challenges, noting friction during the transition to a copper price-linked pricing method over a decade ago. This change was prompted by severe disruptions caused by soaring copper prices. Today, this method is widely adopted, ensuring stability in transactions by factoring in various copper-related costs for each order.

Electric wires are vital for industries, needing robust manufacturer management. Evolving trading systems amid copper price volatility ensure future supply stability.

This article has been published under an agreement between BigMint and Japan Metal Daily.