Copper price indexing in supply agreements

What an index does and does not do

A copper index clause separates the metal value from the rest of the part price. The metal value follows a published reference, usually the London Metal Exchange cash settlement or a monthly average. The conversion, the finish and the margin stay in the supplier's control.

The index is not the supplier's purchase price. A fabricator buys metal with a premium over the exchange, and the premium depends on the product form, the quantity, the delivery point and the credit terms. The index is a common starting point, not a full description of the cost.

The clause also does not decide the whole commercial relationship. It sits inside a price that includes labour, tooling, energy, packaging and freight. Indexing only the metal line leaves the rest of the price to normal negotiation and review.

A good clause is readable by both sides without a spreadsheet argument. It names the source, the date and the unit, and it produces the same number whoever calculates it. If the parties need a meeting to agree what the index means, the clause is not finished.

The three parts of a copper price

The first part is the exchange reference. It is the published price for a defined grade and contract, expressed in a currency and a unit. The reference should name the market, the grade, the currency and the unit, because a tonne price and a pound price are not interchangeable.

The second part is the premium. It covers the cost of turning the exchange product into the form the supplier buys: rod, strip, bar or profile. The premium also reflects freight to the supplier and the commercial terms. It is usually quoted separately and held for a period.

The third part is the conversion. That is the supplier's charge for melting, casting, rolling, drawing, machining, annealing or finishing. It is not a metal cost, and it should not move with the index unless the contract says so.

A clause that says price follows copper without separating these parts leaves the supplier free to apply the index to the whole price. That is not an index clause. It is a price increase with a reference attached.

Choose the reference and the averaging period

Copper is traded in several currencies and several contract months. A clause should state the exact reference: which exchange, which grade, which quotation and which currency. If the price is in another currency, state the exchange rate source as well.

The averaging period matters as much as the reference. A monthly average smooths daily spikes. A single day's quote can be gamed by timing the order, or can land on an unusual day. A quarter average is slower to react and reduces administration.

The timing of the reset should match the production cycle. If the supplier buys metal a month before shipment, a reset on the shipment date leaves a gap. If the buyer sets the price at order date, the supplier carries the metal risk between order and purchase. Either can work if it is written down.

Holidays and market closures also matter. A monthly average that relies on a single fixing can be distorted if the fixing date falls on a day with no publication. The clause should say what happens when the reference is not published, such as using the next available day or the previous published value.

The pass through formula

A practical formula prices the finished part as the metal content plus the conversion and other agreed charges. The metal content is the input mass required per finished part, multiplied by the reference price plus the premium. The input mass includes the yield loss.

The worked example below is illustrative. It uses a round reference price and a simple yield so the arithmetic is visible. The numbers are not a market forecast or a supplier quotation.

Bands, caps and dead zones

A band ignores movements inside a stated range. If copper moves less than the band, the price stays the same. That removes small adjustments and the administration that comes with them. The supplier absorbs the movement in one direction and the buyer in the other, depending on how the band is written.

A cap limits the buyer's exposure above a level. The supplier may price the cap into the base price, because it is carrying risk. A floor does the same for the supplier. Neither is free, and neither should be added without checking the base price.

A collar combines a floor and a cap. It is useful when both sides want a predictable range. The risk is that a large move outside the range is deferred rather than resolved, so the contract needs a review trigger for a sustained breach.

The band should be expressed on the same basis as the index, not on the finished price. A five percent band on the metal content is a different amount from a five percent band on the whole part. State the base and the arithmetic, or the clause will be read two ways.

Scrap, yield and the real material cost

Not every kilogram of copper bought becomes a finished part. Cutting, stamping, machining and set up produce scrap. Some scrap is recovered and sold, some is lost in the process, and some is tied up in work in progress.

If the clause uses the finished weight and ignores yield, the supplier absorbs the difference. If it uses the input weight and ignores scrap recovery, the buyer pays for metal that is sold back. The fair method states the yield assumption and the scrap credit separately.

Scrap value is not the same as the exchange price. It carries a discount that depends on the form, the cleanliness and the buyer. A clause that credits scrap at the full index overstates the recovery. Agree the discount or the credit basis explicitly.

The yield assumption should be tested at the start of a programme and when the process changes. A new tool, a different strip width or a change in the nesting can move the input mass. If the clause is not updated, the buyer and the supplier can both be right on their own numbers and still disagree on the invoice.

Governance and evidence

An index clause is only as good as its records. Each reset should be supported by the published reference, the averaging calculation, the exchange rate if one is used, the premium in force and the yield assumption. Without those, the invoice cannot be checked.

Set a review cadence and a dispute route. If the published reference is unavailable, the clause should name a fallback. If the parties disagree about the premium, the agreement should say how it is reviewed. If a part changes weight or material grade, the formula inputs need to be updated before the next order.

Record the version of the clause that applied to each shipment. A clause that is amended without a version number makes a retrospective audit difficult, because the invoice cannot be tied to the wording in force at the time.

1. 01

   Name the reference

   Exchange, grade, quotation, currency and unit.

2. 02

   Set the average

   Daily, monthly or quarterly, with the reset date.

3. 03

   Separate the premium

   State the form premium and its review period.

4. 04

   Fix the conversion

   Keep the processing charge out of the metal index.

5. 05

   State the yield

   Input mass, scrap credit and the recovery basis.

6. 06

   Record each reset

   Keep the published data and the calculation with the invoice.