Cracking Down on Copper

JUST after I had analyzed inflation last month the commodity and security markets entered upon a real sinking spell. In business and market circles the concern of the moment is with deflation!

Until the week of May 15 the recession was indeed sizable. In commodities the index put out by Moody’s, which is the most sensitive of all, rose 26 per cent between the end of October and April 5, and then started to drop till it had fallen 10 per cent by the middle of May. Sympathelically the stock-market average compiled by the New York Herald Tribune, which in its later career had been dominated by the commodity stocks, had lost 30 per cent of the two-year rise from April 1935 to March of this year.

Ample warning had been given of the overblown condition of the markets. In my outlook in January, I discarded inflation as the chief immediate factor to be watched. On the contrary, so it seemed to me, ‘antiinflationary action would be the main imponderable in investment problems in 1937.’

Events did not immediately bear out this view. Markets started to soar, and I then warned that ‘some people are mistakenly of the opinion that speculation has been ruled out of these markets.’ The remark was not inconsistent with the January view. For anti-inflationary action waits upon the outcropping of ‘abuses,’ as signs of inflation are now called in Washington. In the May issue I wrote on the ‘development of the upper stage of the rise,’ and the current bull market soon after came to an end.

In these observations a commodity of barometrical significance is copper. The following table shows how the price in cents per pound has risen: —

The price on March 31 turned out to be the peak. Two days later the President made a caustic reference to the inflationary copper situation in an effort to ‘talk down’ the price before it manifested itself in living costs. Also he suspended certain government purchases of copper. The manœuvre was successful, and the price of copper has now slipped to 14 cents.

The above price schedule reveals that the rise in copper prices was confined to the period October-March. Up till October the 1936 market registered stability, with a rising tendency. Then it soared 70 per cent within five months — a figure which is its own commentary upon market unhealthiness.

It was during this period that inflation, Colonel Knox’s favorite brickbat in the election campaign, grew into a scare. It explained everything — even the meteoric rise in copper. Some observers said that since gold had been artificially fixed at 70 per cent above the old price, copper ‘ought ’ to follow suit. According to this view, copper, which was 13 cents before the revaluation of gold, ‘ought’ to be 20 cents. This was no reversion to the theorizings of Professor George F. Warren, the administration’s adviser on gold in 1933. It was merely market rationalization.

In these circumstances the advancing flight of copper was regarded with more or less equanimity outside government circles. One heard few complaints even among consumers. It was only after the price broke that the general public discovered dial the copper situation had disguised what the New York Herald Tribune calls an ‘orgy’ of old-fashioned speculation, centred in London.

The ‘orgy,’ I think, is as exaggerated as was the prior lack of notice of it. It is always well to look into supply and demand factors in accounting for the price behavior of commodities. Basically the sharp rise in copper prices was due to producer controls imposed upon the supply of the red metal. That control is exercised in London. It has been in existence since the spring of 1935, and comprises the bulk of the non-American copper producers. For over a year the cartel curtailed output to 70 per cent of theoretical capacity.

Meantime, on the demand side, world consumption arising from business recovery and rearmament programmes was gathering momentum. It seems to have upset all the calculations of the controllers. For the demand grew so boisterous that it competed for the restricted supplies at climbing prices. How much the copper men were taken by surprise is revealed in the American copper companies’ reports for 1936. At least two companies, Phelps Dodge and Magma, reported having sold for future delivery as much as half their prospective 1937 production at 1936 prices. Naturally the cartel had to hoist its quotas. These were raised in stages, as follows: —

However, the raising of quotas in a conference room in London takes time to be translated into new activity at the mines and fresh supplies on the market. During the process, prices were subject to further levitation.

The situation was a perfect setup for the in-and-out speculators. But they merely took advantage of a state of affairs created originally by the existence of control of output in a sellers’ market. ‘It is now recognized,’ says a recent item in the New York Times from London, ‘that the recent rise was exaggerated by the general desire ol copper producers to keep production just a little ahead of consumption.’ Judging from the soaring price, production frequently lagged behind demand.

The reassertion of the anti-trust laws after the invalidation of NRA prevented any American coöperation with the foreign cartel. The demand for copper at home, nevertheless, has been so great that the American situation did not endanger the effectiveness of foreign control in keeping markets tight. Nor did the existence of the four-eent tariff prevent the American price of copper from being dominated by the London price. Copper is a world commodity, and American copper is still on an export basis — the two desiderata for making a tariff ineffective over the long-run price.

The only step in this episode for which domestic producers may be criticized occurred just before the President made his statement. The day after the price in London had shot up to 17 cents the British market turned weak. It was the signal for the decline. But the American producers, with somewhat faulty judgment, raised the American price from 16¼ cents to 17 cents, thus inviting the President’s strictures and exposing the domestic copper men to charges of price management.

It is such marketing controls as have figured in the recent history of copper that encourage offsetting government controls. Laissez-faire by government becomes impossible in a system of privately regulated commodities. Adam Smith’s belief in a natural order was founded upon the lack of interference with competitive markets, and he warned consumers against any meetings among producers, ‘even for purposes of merriment’; he knew that it was prices that drew the producers together. As a matter of fact, there is reason to believe that President Roosevelt was merely acting in coöperation, tacit or prearranged, with the British Government. That government, in its quiet country-club manner, seems to have intervened among the bankers in puncturing commodity speculation in London, lest such speculation should make it pay through the nose for its rearmament.

The general shakeout should not dim one’s faith in the recovery movement, which, no matter how many blisters may develop for the pricking, should acquire a more healthy momentum before the year is out.