The balance between the manufacturer and the customer:
In recent years, the price of a barrel of crude oil has consistently been in the headlines; most of us are concerned with the rising cost of gasoline to commute to work or take that vacation; however, few of us realize the full effect of the price of commodities on our personal and our professional lives.
For example, let’s use the price of gasoline. If it is costing your crews more to get to the job site, you may be forced to increase your rates. The same principle applies to tool manufacturers and the companies that supply the parts for your vehicles. If metals and other precious commodities cost them more, they will charge you more. You will be forced to charge your customers more. However, there are two issues. The first is recognizing when you must adjust to maintain that balance of consumerism. If the manufacturers of the resources you are using make that adjustment and you don’t realize your costs are going up, you probably won’t notice that your profits are dwindling either. The second issue is making that adjustment can be difficult because you’re working under a fixed price contract, and your rates are based on market values that are changing rapidly.
A shifting market
If manufacturers are adjusting their prices to fit the market, you need to as well. Like the electrical contractor, manufacturers work within contracts, which allow them raw materials over long periods of time at relatively fixed prices. However, when the purchasing contracts expire, manufacturers must renegotiate prices, and they may find the price of the raw material has doubled or even tripled. They will have to charge more to stay in business and so will you.
Some manufacturers spread their risk by contracting less than 100 percent of their projected material requirements. The rest of their needs are filled at current spot prices. Since spot prices fluctuate, opting to go this route includes some risk. Commodity prices may drop while the manufacturers are under contract, meaning they can pay less on spot materials and they will be better off for taking that risk. However, what if the price of commodities rise while they’re under contract and they have set themselves up to depend on spot materials?
One method of absorbing the increases is to raise product price today while paying the lower contract prices. This strategy usually results in a bubble in profits for the manufacturer. The bad news comes later when the actual costs to the manufacturer are increased with the renegotiated raw materials contracts.
This year, the big story has been the price of copper. Electrical manufacturing company executives recently revealed widespread concern regarding volatility in the copper commodities market and its effect on the electrical industry. Copper is widely used as a material for the manufacture of electrical products, and the surge in metal prices, including copper, has had an effect on business. To illustrate that rise, on Friday, May 12, 2006, the COMEX high-grade copper spot price settled at nearly $3.97 per pound. At the same time last year, the copper spot settlement price was nearly $1.46 per pound.
In addition, other raw materials used to manufacture wire and cable products are experiencing allocations and price increases while setting record highs.
The consensus of professionals in the electrical industry placed the increased demand due to speculative buying by commodities investors as well as demand due to economic expansion by developing nations. Some experts theorize that China may be stockpiling some metals as a hedge against possible future sanctions. Most electrical industry professionals are indicating that the copper market’s volatility is affecting their business.
There is no question that the skyrocketing prices on products made with copper are having a negative impact on contractors working on fixed price contracts. There seems to be no available help for electrical contractors in this matter. Some would like government intervention; however, most do not think the government should step in.
According to an analysis featured in Purchasing magazine, “China’s 2006 consumption of copper may stay flat at 3.7 million metric tons because of high prices.” Copper prices have more than tripled over the past four years and aren’t showing any signs of backing off. More recently, copper pricing has risen approximately 77 percent from just one year ago on the COMEX Exchange.
Since April 7, 2006, worldwide commodities used in the manufacturing of data communications and low-voltage wire and cable products continue to experience sharp increases in demand. This is resulting in inflationary cost pressures on the market at an unprecedented rate. Wire and cable manufacturers have struggled during the last year to pass along price increases commensurate with the increases they have been realizing in their raw material costs. Allegedly, this has resulted in a significant decline in operating margins for all category cable manufacturers, requiring them to significantly raise their pricing to the market.
Chile’s state-owned Codelco, the world’s largest copper producer, said that a summer rockslide may reduce output by 1,000 metric tons per day. A labor union at Chile’s Escondida, the world’s biggest copper mine, called a strike in August because owner, BHP Billiton did not improve a wage offer. Additionally, reduced supplies from mines in Zambia and Indonesia and strikes in Mexico have pushed copper prices higher.
The U.S. Geological Survey (USGS) puts out a monthly copper report. According to USGS, copper’s spot price in May averaged $3.76/pound. According to International Copper Study Group data, the whole world used 2 percent more refined copper in the first four months of 2006 compared with the year earlier. The big increase—6 percent—came in Europe. There are a myriad of factors driving these prices. Do not forget that as commodity long-term purchase contracts are renewed, we will see hard increases in manufacturers’ costs and product prices.
The aluminum forecast is “muddled,” according to a July 26, 2006, report by Tom Stundza on Purchasing.com. “Companies are hesitant to lock in prices [with prices so high] and will continue to bet on further spot-price declines,” an analyst said. “Daily spot aluminum prices have retreated 25 percent to $1.12/lb. [in late July] from their May 11 peak of $1.49.”
The price of nickel has gone way up and has stayed there. According to a June 27, 2006, report on Purchasing.com, which cited Credit Suisse Group information: “Inventories have dropped 61 percent this year while demand from stainless-steel makers is growing. Consumption will rise 7.9 percent in 2006, exceeding production by 15,000 metric tons.” Separately, Purchasing.com reported on July 12, 2006, that nickel prices hit a new record in early July.
In addition, aluminum is at an 18-year high, steel is up this year, and zinc and palladium are also on the rise. These increases are having an effect on manufacturers of racks, cabinets and other metal accessories.
Basically, because of the rising costs of commodities, business will cost more in the future. Technology is pervasive, and change is rapid. You must make decisions on current and accurate information. Too many companies are in the red today because their decisions were based on what they thought was happening rather than what was actually happening. Don’t let yours be one of those companies. EC
BISBEE is with Communication Planning Corp., a telecom and datacom design/build firm. He provides a free monthly summary of industry news on www.wireville.com.