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Copper Shortage Looms for Building Sector

Copper Shortage Looms for Building Sector

New home builders and developers are being warned to expect higher costs for electrical work as strong demand pushes the international price of copper to a 16-year high.

Copper prices have increased to US$2877/tonne on the spot market, an increase of 70 per cent over the five-year average, with a 17 per cent surge in the last four weeks. Copper inventories are under pressure due to strong demand from China, an awakening of the European and Asian economies, and supply disruptions caused by mudslides in Indonesia and strikes in Peru.

Around 50-60 per cent of all copper production is for the cable manufacturing industry. The rapid escalation of prices means costs will inevitably flow through to developers and contractors, and ultimately to property owners and investors.

The spike in international prices comes at a time when the building and development sector is at full stretch, and there are concerns that contractors and their customers will face additional costs unless supply contracts have been negotiated in advance.

“We are aware that manufacturers have absorbed a lot of the additional costs in recent months, but the latest escalation of copper prices has been so rapid that the additional costs can not be recovered on fixed price contracts,” says Ray Barbara, Chief Executive of the Electrical Contractors Association of New Zealand.

“Developers and new home builders need to realise that it’s impossible for electrical contractors to base their costs on fixed prices in the medium term. Electrical contractors should include cost escalation clauses in the bids they present to customers.”

“The situation is volatile and extraordinary in both the magnitude of the increases and how frequently they have occurred,” he says. “The effect is being compounded by increased labour costs, which have become even more sharp in the wake of the devastating floods in the lower North Island.”

“Homeowners and developers should be aware that the cost of electrical work is likely to rise, and to make sure that their specifications are appropriate for their needs and their budget. We see the current situation remaining for the medium term. It will require prudent management by developers, contractors, specifiers and their clients to ensure electrical projects are completed within budget, without any one party being caught with the full impact of the increases,” Mr Barbara said.

The strong New Zealand dollar has provided only limited protection against the rampant copper index. The New Zealand dollar has appreciated by more than 20 per cent in the past six months, whereas the cost of copper, paid for in US dollars, has surged by more than three times the rate of currency appreciation. While the high prices have renewed interest in the commercialisation of new copper reserves, it is unlikely these will have an impact on copper prices in the near future. Unmined copper reserves are mainly in areas affected by political instability. With demand remaining strong, metal industry commentators are forecasting prices to remain high for the foreseeable future.

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