4Q11 IPD Commodity Reports

4Q11 IPD CommoDIty RePoRts | 1 © 2011 American Supply Association. All Rights Reserved.

4Q11 IPD CommoDIty RePoRtsThe IPD COMMODITY REPORTS are prepared quarterly in February, May, August & November by the members of the IPD Executive Council

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This report is published as a member service of the American Supply Association’s Industrial Piping Division (IPD). Its contents are solely for informational purposes, and

any use thereof or reliance thereon is at the sole and independent discretion and responsibility of the reader.

While the information contained in this report is believed to be accurate as of the date of publication, ASA, its IPD and the authors disclaim any and all warranties, express

or implied, as to its accuracy and completeness.

©2011 American Supply Association. All Rights Reserved.

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2 | 4Q11 IPD CommoDIty RePoRts © 2011 American Supply Association. All Rights Reserved.

CARBON STEEL PIPE

Overview

“It’s the same old song with a different meaning since you’ve been gone…” (for all you younger “cats,” this a musical reference to the 4 Tops, a defining Motown Group from the 60s), refers to the continued reporting of the anemic demand in the standard pipe business as before, born out by lackluster 2% GDP growth and continued stubbornly high unemployment of 9.1%. We have seen a gradual weakening of standard pipe prices (nothing overly dramatic) this quarter with the sense this might continue. However, two significant events have taken place. First, Severstal has announced a $60/ton hot band increase in response to rising scrap prices, and second, the Committee on Pipe Tube Imports filed dumping trade cases on 16” and under welded pipe against two Middle Eastern countries, including a mill in India as well as mills in Vietnam. This will have a significant impact in the short-term on the pricing of Merchant pipe used in general construction. With our national election a year away, the U.S. economy will be on hold until our leadership issues are settled. Other than the “Good Ol’ Energy Market,” don’t look for any breakout from our current malaise.

Import Carbon Steel Pipe

Import Carbon Steel ERW pricing this last quarter has tried to go up in fits starts, but instead, has trended on a slight downhill curve. Grade B prices seem to be hovering for the time being on the low side in the mid 900s and on the high side at just under 1000. The spread for Grade A is a bit wider with lows in the 920s and highs over 1000 depending on the country.

The new dumping cases will have an effect perhaps not so much in rising prices as much as tightening supply. There is still not enough demand and there are plenty of foreign mills. It seems that there is always another country ready to jump in when another has been restricted by import duties.

Deliveries from offshore mills seem to be about as quick as we have ever seen them. In the past, when business was more brisk, it was not uncommon for deliveries to take six to eight months. Now, most mills are delivering in 120 days or so.

Import Carbon Steel Seamless pricing has remained pretty steady for the last six months or so. There are more sources than ever to pick from with India coming on pretty strong. Russia, Croatia and the Ukraine are also being seen in the market on the West Coast as well.

Pricing for seamless pipe products has remained stable throughout, but ERW pipe pricing (6” and under) has been volatile with smaller producers fighting over market share in times of diminished demand. Pricing in the 8” and above ERW market continues to be stable.

Domestic Carbon Steel Pipe

Overall demand remained lackluster through 3Q2011 due to economic conditions. The average HR coil cost fluctuated during and settled out $70/ton lower at the end of the third quarter from where it began June 1st., and customers went through a period of only buying to fill holes. Non-residential construction is still flat with no growth projected in 2012. The domestic (on-shore) oil and gas industry continues to see strong demand with the shale plays at the Marcelus and Bakken. Demand for pipe products in the hydrocarbon market remains robust.

As reported by the ISM, economic activity in the manufacturing sector expanded in October for the 27th consecutive month, and the overall economy grew for the 29th consecutive month.

The PMI registered 50.8%, a decrease of 0.8 percentage point from September’s reading of 51.6%, indicating expansion in the manufacturing sector for the 27th consecutive month. The New Orders Index increased 2.8 percentage points from September to 52.4% indicating a return to growth after three months of contraction. The Prices Index at 41% dropped 15 percentage points and is below the 50 percent mark for the first time since May 2009 when it registered 43.5%. Inventories decreased to 46.7%, which is 5.3 percentage points below the September reading of 52%. Comments from respondents are mixed indicating positive relief from raw materials pricing and continuing strength in a few industries, but there is also more concern and caution about growth in this uncertain economy.

Of the 18 manufacturing industries, eight are reporting growth in October in the following order: Computer & Electronic Products; Petroleum & Coal Products; Food, Beverage & Tobacco Products; Nonmetallic Mineral Products; Primary Metals; Fabricated Metal Products; Paper Products; and Machinery. Also listed in order are the six industries reporting contraction in October: Plastics & Rubber Products; Chemical Products; Apparel, Leather & Allied Products; Printing & Related Support Activities; Electrical Equipment, Appliances & Components; and Miscellaneous Manufacturing.

Inventory in both raw material and finished goods are at good levels throughout the supply chain although they grew somewhat this year with the run-up in carbon steel pricing. This remains a good sign and will aid in a sustained recovery as demand picks up.

Pricing for seamless pipe products has remained stable throughout, but ERW pipe pricing (6” and under) has been volatile with smaller producers fighting over market share. Pricing in the 8” and above ERW market continues to be stable.

Continued on page 3


Continued on page 4

CARBON STEEL FITTINGS & FLANGES

Carbon Forged Steel Fittings & Unions

There is no indication of price changes for this product line through the remainder of the year. SBQ (Special Bar Quality) hot rolled steel prices that drove the last increase have held up during the recent downward pricing of hot rolled coil. Lately, there has been a slight drop in ferrous scrap prices that remain under pressure. There is no relief in the base price of SBQ as this product is the mills sweet spot. The mills are projecting that there will not be any base price change through the 1Q2012.

It has been reported that a well-known European import source is starting up manufacturing in the Houston area. Speculation has it that it is attempting to hold on to its presence in the United States. The high cost of manufacturing in Europe along with the weak dollar and shipping costs presently restricts its competitiveness.

Also, another reputable supplier of import stainless & brass fittings and related piping components is now carrying import, non-European carbon forged steel fittings & related products. There is only one primary source of this material with several domestic manufacturers/suppliers stocking the same. It is apparent there will continue to be pricing pressures to hold onto one’s market share.

Initial orders fill rates within 48 hours remain at excellent levels with average back order completion within 4 weeks. There is no indication of shortages, and with so many sources, overstocking becomes more risky.

The strong oil shale drilling activity is expected to continue into 1Q2012. There is more uncertainty in keeping the gas shale activity strong due to the low market price and environmental regulations. Offshore drilling activity is anticipated to begin its recovery. Industrial activity picked up in 2011 and is expected to continue in 2012. Canada will continue to experience growth with its crude oil sands

production. US manufacturing’s increased activity has opened

up spending on plant maintenance, expansions and other

capital expenditures. Commercial projects will remain weak

due to budget restraints and the dismal housing market.

Other concerns going into 2012 are the European debt crisis

along with the slowing of the Chinese economy. Both these

conditions underscore future supply and demand instability.

In summary, we expect prices to be stable and supply to

remain excellent through the first quarter. Confidence in

continuing the 2011 expansion and growth levels through

2012 is less optimistic. All facts lead us to believe that the

PVF sector should be pleased if we can repeat 2011 sales and

maintain margins.

Carbon Steel Weld Fittings & Flanges

As the year comes to a close, the state of the market is still

plagued with uncertainty. The fear of a double-dip recession

is still looming here stateside while Europe continues to deal

with a bailout in Greece. Inflation and rising labor costs in

China continue to have an adverse effect on steel pipe, which

is used to produce weld fittings in countries such as Malaysia,

Thailand, Mexico and India.

Weld fittings and flanges in the domestic market have had

a good year in spite of the EPA regulations and government

overreach. Pricing to distributors has remained stable and

will likely continue the trend through the remainder of the

year. An increasing need for clean fuel development will be

a driving force for natural gas, clean coal and nuclear power,

which, in-turn will mean an ever increasing need for carbon

fittings and flanges alike. The global financial and civil unrest

will continue into 2012, but this should have no bearing on the

commodity market throughout the rest of the year.

CARBON STEEL PIPE...Continued from page 2


CARBON STEEL FITTINGS & FLANGES...Continued from page 3

Continued on page 5

STAINLESS STEEL PIPE, FITTINGS & FLANGES

Since our last report in mid-August, the world economic outlook and financial markets have become an even murkier place. And being a nickel price bull over the past few months has probably felt much like a weak swimmer, who is caught in rough waters, feels trying to make his way back to shore. Whenever he thinks he’s making progress, another wave comes crashing down on his head. Nickel has been battered; average monthly prices have fallen three consecutive months – about 7% in August and around 7-1/2% in both September and October. But the last few months have offered equal opportunity “beatings,” to the entire base metals complex. Below is a price comparison of the six base metals (based on monthly LME averages):

Base Metal October Average

% Change vs. July

% Change vs. ’11 Peak Month

Aluminum $0.9853/lb. -13.52% -18.42%

Copper $3.3328/lb. -23.62% -25.54%

Lead $0.8839/lb. -27.36% -28.91%

Nickel $8.5668/lb. -20.41% -33.15%

Tin $9.8850/lb. -20.21% -32.86%

Zinc $0.8433/lb. -22.23% -24.58%

Nickel was already battling its own fundamental “image” problems before 17.5% of its value was wiped out during the week of September 19th - the worst week for U.S. stock markets since October, 2008. All base metals and most commodities have been caught in the maelstrom of global macroeconomic malaise centered primarily on the Euro zone debt crisis, a slowdown in Chinese factory activity and the continuing risk of the U.S. recovery moving from a crawl to a stall.

It’s virtually unanimous among analysts that increasing supplies of refined nickel will create a sustained surplus through at least next year and continue weighing on prices through at least the end of this year. It’s also widely believed that the current outlook for stainless steel production, which constitutes two-thirds of aggregate demand for nickel, is deteriorating. Worldwide projected 2011 annual production figures were recently revised downward from 35 million metric tons to about 32 million. While it would still be the highest all-time global output, the lower projections have further dampened investor sentiment and exacted additional short-term damage to nickel’s price levels.

Cautious Optimism Gave Way to Herd-Driven Pessimism

The path of the U.S. dollar is arguably the key driver of all base metals since their prices tend to move in an inverse correlation to the dollar. Macro-economic data is also vital to investors’ sentiment of industrial metals. But lately, it seems as if virtually any negative turn for a whole host of assets, including but not

limited to oil, gold, copper, iron ore and global equities, weighs on nickel prices. Indeed, the industrial metals world was a calmer, more tranquil place before late September’s global equities market rout, but since then, most asset classes have recovered markedly better than nickel (+3.12%) and the other base metals. At the time of this writing, the DOW is 11.64% higher than it closed September 22nd, and oil has moved up 15.35%. The impact and degree that speculative activity has had on metals (and other commodities) is well-chronicled. The fact that the non-traditional metals investors generally enter and exit in mass has had a lot to do with the boom and bust patterns that drive metals-dependent businesses crazy. But perhaps the last few experiences of whiplash will stem the flow of a considerable amount of speculative money out of nickel and other industrial metals – at least temporarily. Bill O’Neill of LOGIC Advisers asserts, “Commodities are no longer the flavor of the month, so I think they’ll be slow to come back in.”

Tightening Global Credit Environment May Place Further Choke-Hold on Metals’ Demand Outlook & Prices

A by-product of the uncertain global economic outlook is a considerably more cautious approach towards lending to investors, traders and enterprises associated with metals like nickel which are linked to economic growth, and thus, more susceptible to radical price swings than other commodities. Banks are becoming more hesitant to provide or renew lines of credit for these types of businesses, which forces them to try and arrange for alternative credit sources or cut back on procurement and production activities, which at a bare minimum, curtails growth. Metals manufacturers and converters in Europe are certainly not immune to the fallout from the financial mess over there. Stephen Briggs of the giant European-based bank BNP Paribas recently commented on weakening European manufacturing data and projected continued volatility and associated risks: “As sentiment ebbs and flows about economic prospects you would expect them (industrial metals) to be the most exposed to swings in sentiment.” Moving forward, credit availability and related terms should prove to be a major factor and gauge of the overall health of the metals industry.

Metals’ Bulls Hopes Continue to Rest on China

Beijing’s repeated attempts to rein in inflation persist. Interest rates have been increased five times and reserve requirements for banks have been raised nine times since last October. China’s official Purchasing Managers’ Index dropped from 51.2 in September to 50.4 in October - the lowest level in 32 months. A reading above 50 foretells expansion whereas a figure below 50 indicates contraction. Now that the braking mechanisms are beginning to take hold there, metals’ analysts are trying to comprehend the prospective impact that a significant slowdown would have on global price levels. Since China is the world’s largest consumer of all base metals including nickel as well as the source of any recent consequential growth, a sustained decline in its consumption would likely result in lower prices. The current situation is


STAINLESS STEEL PIPE, FITTINGS & FLANGES...Continued from page 4

Continued on page 6

further stressed by the tightening credit environment and resultant payment delays to major Chinese steelmakers. Commodities analyst Caroline Bain of Economist Intelligence Unit (EIU) is more optimistic about the foreseeable future of demand in the PRC than most: “China’s demand may be somewhat weaker in 2012, but it will sustain global demand for commodities. China is believed to have run down stocks of base metals in 2011, which coupled with markedly lower global prices, could spark a rush of Chinese buying in early 2012.”

Nickel Pig Iron Providing a Ceiling & a Floor to Refined Nickel Prices

The production of nickel pig iron (NPI) in China has reached its tipping point, at least for the time being. Total projected output for 2011 is anticipated to be as high as 300,000 MT, which is up from around 170,000 MT in 2010 and ZERO in 2005. The price decline on the LME has dropped price levels of refined nickel below some of the higher cost NPI production. That capacity has already been abandoned, but if nickel prices should increase, it can be brought back on quickly. On the other hand, if present (or lower) price levels persist for an extended period, then we can expect to see substantially more NPI production curtailed in 2012. The International

Nickel Study Group (INSG) projects consecutive, approximate 6% increases in global consumption of primary nickel in 2011 and 2012. However, the INSG also forecasts production increases of 11% this year and up to an additional 9% in 2012, which is of course, at the heart of nickel’s weak fundamental outlook. Nickel pig iron being used as a substitute for refined nickel is an ideal example of free market economics at work. There is irony in the fact that NPI is only employed in China.

Continual LME Stock Drop Defies Doomsday Forecasts

Despite widespread expectations for a supply surplus beginning to manifest itself during the second half of 2011, LME stockpiles continue to fall. This ongoing development is even more peculiar based on reports that the traditional post-summer seasonal demand pick-up failed to materialize to any real appreciable degree. Inventories are currently at their lowest level since February 9, 2009 and have dropped more than 37% since the beginning of this year. While stocks are still relatively high in historical terms and represent around 20 days of aggregate global consumption, any significant disruption in supply or spike in demand could bolster nickel’s price outlook in a hurry. It’s not as if we haven’t seen that happen before!

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07

Jul 0

7 A

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7 Ja

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Fe

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ar 0

8 A

pr 0

8 M

ay 0

8 Ju

n 08

Ju

l 08

Aug

08

Sep

08

Oct

08

Nov

08

Dec

08

Jan

09

Feb

09

Mar

09

Apr

09

May

09

Jun

09

Jul 0

9 A

ug 0

9 S

ep 0

9 O

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9 N

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9 D

ec 0

9 Ja

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Fe

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ar 1

0 A

pr 1

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ay 1

0 Ju

n 10

Ju

l 10

Aug

10

Sep

10

Oct

10

Nov

10

Dec

10

Jan

11

Feb

11

Mar

11

Apr

11

May

11

Jun

11

Jul 1

1 A

ug 1

1 S

ep 1

1 O

ct 1

1

LME INVENTORY (MT) LME CASH PRICE AVG (LB)

CA

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LME

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STAINLESS STEEL PIPE, FITTINGS & FLANGES...Continued from page 5

“Once Bit, Twice Shy” Weighs on Demand & Service

To a degree, the negative sentiment

surrounding nickel’s and corresponding

stainless steel price levels has fed on

itself and further affected demand

and market confidence. Also, the

calamitous nickel price collapse of

4Q2008 has changed the procurement

mindsets (and capabilities) of many

key producers, distributors and end

users throughout the stainless steel

industry, including the PVF sector.

Due to the volatility of nickel and

other key stainless inputs, there is an

inherent, increased aversion to risk,

which has resulted in lower stock levels

and diminished service performances

throughout the entire channel. The

“ripple effect” of reduced service and

delivery capabilities from major steel

mills, manufacturers, converters, master

distributors and distributors continues

to place additional strain on already

compromised industry fill-rates as

extended delivery lead times continue

to lengthen.

Most SS PVF Should Remain Firm

Investors who placed bets that nickel’s

price would rise have certainly been

barbecued during the second half of

this year. But, with the exception of

pipe, all stainless steel PVF products

have maintained their value or actually

increased throughout the year. Rising

wage, energy, factory, credit and

transportation costs have essentially

rendered the recent reductions in

raw materials an offset (at best) for

international manufacturers of labor

intensive products. Several of these

manufacturers are struggling to

maintain or return to profitability.

Demand remains fairly solid, and there

may be a greater inclination towards

stainless PVF product lines not driven

by surcharges to increase.

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Jun

2007

Aug

200

7

Oct

200

7

Dec

200

7

Feb

2008

Apr

200

8

Jun

2008

Aug

200

8

Oct

200

8

Dec

200

8

Feb

2009

Apr

200

9

Jun

2009

Aug

200

9

Oct

200

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Dec

200

9

Feb

2010

Apr

201

0

Jun

2010

Aug

201

0

Oct

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Dec

201

0

Feb

2011

Apr

201

1

Jun

2011

Aug

201

1

Oct

201

1

SC

RA

P &

CH

RO

MIU

M P

RIC

ES

(M

/T)

MO

LYB

DE

NU

M P

RIC

ES

(M

/T)

INPUTS THAT IMPACT STAINLESS STEEL PRICES

Molybdenum 18-8 SCRAP Chromium

0.000

0.500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

5.000

Jun

07

Aug

Oct

07

Dec

Feb

Apr

08

Jun

Aug

Oct

08

Dec

08

Fe

b

Apr

09

Jun

Aug

09

O

ct 0

9

Dec

09

Fe

b

Apr

10

Jun

10

Aug

10

O

ct 1

0

Dec

Feb

Apr

11

Jun

11

Aug

Oct

11

SURCHARGES FOR AUSTENITIC STAINLESS STEELS

304/L SURCHARGE 316/L SURCHARGE

SU

RC

HA

RG

E (P

ER

PO

UN

D)


COPPER TUBE & FITTINGS

Overview – Copper Gleams with Opportunity

After riding the wave of copper prices that have almost doubled in the last two years, the final quarter of 2011 has led to what may have been the moment of maximum pessimism for the red metal. In the short run, copper has been hated, and investors have not wanted to touch it. The price has fallen dramatically from roughly $4.50 during the third quarter to roughly $3.50 at the end of October. One possible explanation is that we’re on the brink of a major catastrophe in the global financial system, similar to what we saw in 2008, when banks failed and money markets seized up causing investors to panic here in the U.S. Except this time, that situation is playing out in Europe. In all probability, it won’t be contained in Europe, though. Investors are braced for more bank troubles to affect us here at home as a result.

The price took a sizable hit when Europe’s finance ministers abruptly canceled a meeting that was scheduled for the last week in October. Disappointment and a grim outlook for Europe’s debt crisis were based on the appearance that the finance ministers’ political deadlock would prevent them from convening and making meaningful improvements. Within days, Euro zone leaders struck a deal to contain the region’s problems leaving the details unspecified. The intention was to create a plan to slash Greece’s debt burden and strengthen their rescue fund reinforcing the general perception, whether valid or not, that European leadership was cooperating to seriously address the financial catastrophe. Market reaction was to take a breath, stop fixating on the problems and risks posed by Europe, and look once again at the strong underlying fundamentals for the metal. With the focus on that, the price started gaining once again. The largest increase since January 2009, a 13 percent jump, occurred in that same week. By contrast, copper had lost about a quarter of its value in 3Q2011 making it one of the worst performers among commodities during the period.

But market sentiment is now able to reverse on a dime thanks to constant information being fed to investors via the Internet and the 24-hour cable TV news cycle. By November 1st, European leaders were shocked and angered to learn that Greece’s prime minister, George Papandreou, responded by announcing plans that he would not accept an emergency bailout without putting it to a national referendum. Stock markets suffered punishing losses at the news as the prospect of a “no” vote could trigger Greece’s default and a complete currency collapse.

For now, the rise in copper price is steady enough to cause leading shares in mining companies to gain momentum. Barron’s reported during that same eventful week in October that it is now a “gleaming buying opportunity” for bargain hunters thanks to robust fundamental factors.

Fundamentals Must Eventually Prevail

The vital market forces, supply and demand, never rest. As the above scenario plays out, the fact that demand is unrelenting, and the supply is said to be diminishing, stays in place.

Despite fears that China’s growth will slow, the country’s pattern of moving people from rural to urban environments is keeping demand up. Unlike westerners who interpret the drop in price as an economic downturn, China optimistically sees it as an opportunity to replenish stockpiles, although there are certainly pauses in the ongoing push to build up infrastructure. It has become clear that China is suffering from a credit crunch facing its own “subprime crisis.” When Chinese banks cut off lending, businessmen turned to high-interest informal lenders figuring that a month or two later, they would get bank loans again to repay their debts. But the banks are not lending, and “back-alley” lenders are calling in their loans. Companies are defaulting and disappearing by the dozen; USA Today called it “a festering mess of borrowings gone sour.” A Wall Street Journal article attributed some of copper’s recent slide downward to the fact that Chinese investors have been using their stored copper as collateral for credit and had to sell to pay their “back-alley” debts.

Still, China’s underlying need for copper for development is not going to go away, and it would take a very long and profound recession, or perhaps a depression, to alter the favorable fundamentals. In addition, similar economies, like India, Russia, Indonesia, Mexico and Brazil, are lining up to add to demand as they experience explosive growth, and their infrastructure projects fuel consumption.

Supply issues continue to bolster price with labor disruptions at Freeport-McMoRan Copper & Gold Inc.’s Grasberg Mine in Indonesia. Eight thousand workers have been on strike since September 15th at Grasberg, the largest publicly-traded copper producer in the world. The dispute has turned violent with several killings, damage to equipment and road blockades. The attacks have set back efforts to maintain metal output through the use of contract workers. Freeport has been working with customers to reschedule deliveries, but the strike has forced this copper giant to declare force majeure activating the clause included in its contracts to remove liability for catastrophes that prevent sales agreements from being fulfilled. Pipelines that were sabotaged by workers had been unable to be accessed for repairs because of road blockades, and stockpiles at the port were depleted leading the mining operation to utilize the force majeure option. The company said that this strike combined with an eight-day strike in July has led to a loss of about 70 million pounds of copper in the third quarter and has cut its production and sales forecast for 2012.

Stable Infrastructure & Exploration is Needed

Disruptions to supplies have also come in the form of massive power blackouts grinding top mining and smelting operations

Continued on page 8


in Chile to a halt at times. The power supply infrastructure in Chile is often criticized as being inadequately maintained by its government, and these incidents further expose its fragility.

The lack of new mining discoveries also continues to paint a picture of dwindling supplies. Exploration projects were thwarted during the recession, and new mines are very slow to come online. Over the past 10 years, copper demand has increased almost 7-fold, but it has been nearly 100 years since any significant new discoveries have been made.

Metal Theft a Growing Concern

A tiny but growing percentage of the supply of scrap copper is vulnerable to theft further adding to the likelihood of a price rebound. The fact that copper is poised for a rally is great news for investors, but it also inspires criminal activity.

COPPER TUBE & FITTINGS...Continued from page 7

PLASTICS

This section included only in the 1Q and 3Q reports.

VALVES


Commodity thieves become active when times are hard and when loosely-regulated scrap dealers are paying cash for piping and wire. It is an escalating problem that law enforcement is turning its attention to, and we will probably soon see sellers required to present ID and fill out paperwork for each transaction. The American Supply Association has been very vocal in advocating our industry’s interests and promoting new legislation and regulation in this regard, including Congressional testimony from the lips of ASA members.

To summarize, copper still appears to be a fundamentally sound investment choice despite retreating from its record price. Unpredictable supply and high demand conditions are expected to remain unchanged regardless of whatever hiccups may come along the way.

GROOVED FITTINGS


MALLEABLE IRON FITTINGS


4Q11 IPD Commodity Reports

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