High Five: Rising copper price increases production cost of nickels

June 9, 2011

Copper's rising value from its Great Recession crater has increased the cost of making a nickel to more than the coin's worth, an Indiana State University professor estimates.

As the global economy continues to improve following the worst recession since the Great Depression, metals used in global manufacturing, such as copper and zinc, have become more expensive, said John Tatom, ISU associate professor of finance and director of research for Networks Financial Institute in the Scott College of Business at ISU. Though copper prices are not near their stratospheric highs in 2007 before the economic collapse, the increasing costs have had an effect. While copper is commonly considered to be an integral component in the penny, it is actually more heavily utilized in nickels, Tatom said. While copper and other commodity prices fell in early May, the price of copper is almost twice as high as it was at the end of the recession.

The cost of copper is about $4 per pound; since the nickel is about two-thirds copper, the cost of producing each coin is now about eight cents, three cents more than the coin's monetary value.

"At eight cents, it's probably very profitable to melt nickels" for their resource value, Tatom said. "The only thing that would keep people from doing that is the fact that it's illegal." He pointed out that it's also illegal to export coins out of the country to then melt them down.

The price of metals has been increasing as the economy has been expanding since the end of the recession. Historically, commodity prices typically decrease, not rise, Tatom said.

"But, with certain commodities in short supply and rapid growth in demand in emerging markets, some people have gotten the idea that commodity prices are set to explode," he added, "and that's why they're really interested in any twist on a commodity price story."

Though the prices have been increasing, Tatom questions whether that will be a long-term development for most metals, since there are areas where mining "is not very active."

"At the prices today, you could revive a lot of mining," Tatom said, "and you could get a cycle where prices plummet because of expansion of supplies."

Historically, people have found ways to capitalize on the higher value of money. While people may not necessary melt down coins, when the actual value of the coins increases to more than their face value, people tend to hoard them, which takes them out of circulation, Tatom explained.

"So you get the same result, whether they actually melt them down or not," he said.

Though prices may eventually come down, the issue of commodity prices leads to a different debate of sorts. As costs continue to rise, it is inevitable that the price of producing certain coins will be more than their face value, Tatom said.

"Whether it's a penny or a nickel, it will cost more to produce, and those things tend to go out of existence," he added, "and many countries have seen their basic units of exchange go out of existence."

That reality means that people could face several choices. One possibility is that specific coins, such as pennies or nickels, could be taken out of circulation and prices could be rounded accordingly, Tatom explained. He added that another possibility is simply to make the coins with cheaper materials.

"I think if you could change the composition, it's more popular, because then people are still dealing with the same coins," Tatom said. "The coins may look different, but they still have the same units, and that's something people are more comfortable with."

Photo: http://isuphoto.smugmug.com/photos/i-bQXbPLG/0/L/i-bQXbPLG-L.jpg (ISU/Photo illustration by Tony Campbell)
The rising price of copper, a key component of nickels, has led to the cost of producing the five-cent piece to be more than the coin's face value.

Contact: John Tatom, director of research, Networks Financial Institute, Scott College of Business, Indiana State University, 317-536-0281, ext. 712, or john.tatom@isunetworks.org.

Writer: Austin Arceo, assistant director of media relations, Office of Communications and Marketing, Indiana State University, 812-237-3790 or austin.arceo-negrich@indstate.edu.