Oil industry braces itself against rising copper price

Fixed-price contracts may become history with unprecedented inflation in raw material outlays

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By  Nicholas Wilson Published  June 6, 2006

Copper prices soared 300% in the past 18 months, hitting yet another record high last month, driving up energy project costs and spurring firms to invent products that use less copper. The raw materials crisis, however, is not slowing down projects or hitting contractors as hard as it is the non-energy construction sector, as some oil firms are putting price-escalation clauses into contracts. Sachin Kerur, senior associate at Pinsent Masons’ International Construction & Energy group, said: “Fortunately, for oil and gas contractors, the client side is slightly ahead of their brethren in non-energy construction. Big clients such as Saudi Aramco have been progressive in price-escalation provisions and are allowing prices to rise with inflation.” However, contracts will be heavily policed and contractors will have to provide ample evidence of their costs, he said. “Business will be affected if companies sign up for fixed-price contracts,” said Mark Prior, regional managing director at cost consultant EC Harris. “Projects could also become unviable,” he said. To date, the energy sector has been sufficiently nimble in adapting contracts, whereby copper prices have not delayed or stopped projects. Kerur said the hydrocarbon production bottleneck means that, “Unlike building a hotel, the energy industry cannot wait.” The industry’s suppliers are also being flexible and are producing new products that use less copper, which is widely used across the sector in both upstream and downstream operations in: wires, cables, catalysts, plumbing and some drilling. Mike Smith, regional vice president of Anixter, a wire and cable provider, said the firm is using more fibre optic cables and developing new products, such as its Field Bus Technology—a hub that uses less cable. “Copper prices, whether they remain at current levels or significantly drop, will have an impact on project costs,” he said. Analysts and copper producers say that China’s ravenous hunger for raw materials, combined with speculators hoarding the metal are behind the price spike. In January 2005, it cost about US $3,000 dollars per tonne and a year later hit $4,518 dollars—a record high since current format records began in 1870. By May, this year it had raced to $8,500 before falling $500. Some analysts point their fingers at investors holding copper to offload it when the price is right. Maqsood Ahmed, an analyst at Calyon Global Trading said: “The metal is being hoarded” by speculative funds. Some large traders and macro-hedge funds may have up to 300,000 tonnes of copper worth about $1 billion that is not in warehouses registered with futures exchanges, he said. Others in the industry say it is only Chinese demand that is driving prices. Juan Villarzu, executive president of Codelco, the world’s biggest copper miner, said: “It took some time to realise that the growth in Chinese demand would stay steady, instead of slowing, but the supply is adapting and there will be more production. The high prices aren’t sustainable.’’ The big mining firms are beefing up output and expect to drop prices within two years, he said.

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