Office of the Historian

296. Memorandum From the Chairman of the Council of Economic Advisers (Ackley) to President Johnson1

Washington, November 8, 1965.

SUBJECT

  • The Copper Price Increase
1.
Anaconda has now gone along with the 2 cent increase in the price of copper to 38 cents a pound. The increase started abroad when Chile and Zambia went up by 2 cents. Some of the smaller American companies followed [Page 735] last week. Kennecott and Phelps-Dodge, the other two big producers, have not yet moved.
2.
Copper has been in extremely short supply for several years, and the situation is getting no better. Although we are the world’s largest producer, we depend on imports for roughly 1/3 of our supplies. Thus the world shortage affects us.
3.
The shortage basically reflects rising world usage in the face of failure to discover new deposits as old ones are worked out. But it has been complicated by an endless series of production difficulties. Last year U.S. production was crippled by strikes. Chile has had repeated strikes. President Frei’s program gives the promise of increased production in the future, but the Chilean miners are on strike again right now protesting Frei’s law as not being tough enough on the companies. Troubles in the Congo have interrupted production there. Production in Zambia has been on and off this year and is in danger of a tie-up as a result of the Rhodesian independence movement. (Zambian copper is produced with Rhodesian power and moves out on a Rhodesian railroad.)
4.
The major U.S. producers have tried to keep the domestic price down. Although their price has edged up from 31 cents to 36 cents in the last two years, it has stayed far below the price in the free “secondary” or “dealers” market, where the price is now about 60 cents. The big producers have been rationing their customers, forcing many users to go into the secondary market for all or part of their needs.
5.
The stockpile surplus is now gone, with 120,000 tons released for commercial purposes this year and 110,000 tons transferred to the Mint for the new coinage. We still have 775,000 tons of copper in the stockpile, but all of it is required by the stockpile objective. To get additional releases would require both a change in the stockpile objective and Congressional action.
6.
On narrow economic grounds, a rise in the price of copper has merit. There simply is not enough copper to go around, and there is little prospect that the situation will improve, even in the long run. An increase in the producers’ price makes users economize on copper, eliminating the least valuable uses, and switching to substitute materials. By reducing the extent of producer rationing, it also gives the little fellow or the new business a fairer chance to get copper at the same price as the traditional customers of the companies.
7.
On the other hand, we can’t welcome a copper increase in the middle of the aluminum crisis. Moreover, the big copper companies are far more profitable than the aluminum companies, and their profits are rising faster—up 54% in the first 9 months of this year compared to last. Their rate of return on equity is about 12% this year—better than either [Page 736] aluminum or steel. They also probably benefit more from percentage depletion.
8.
It would be very desirable if Kennecott or Phelps-Dodge could be persuaded to hold off on a price increase, at least until we have the aluminum and steel situations in hand. The President of Kennecott is F.R. Milliken, and of Phelps-Dodge is Robert G. Page. Both companies have their offices in New York.
Gardner Ackley
  1. Source: Johnson Library, Confidential File, Oversize Attachments 12/65, Box 161. No classification marking.↩