Copper price rules
A significant part of the cost price of a cable is determined by the conducting materials. Copper, Aluminum or Fibers: depending on the cable type these materials can determine over 70% of the costs.
That’s why wire and cable manufacturers and distributors aim to minimize the working capital in the operations. In recent years, all leading companies in this industry invested a lot in inventory reduction programs. The best practice in the cable manufacturing industry is to keep inventory turns above 6 per year.
The high price of copper (and other conducting materials) means that a lot of capital is captured in raw materials and (semi) finished products. That’s why you see double fences around the warehouses and factories of cable manufacturers and distributors.
A lot of capital in this industry sits in warehouses and factories. The high price volatility of metals such as copper and aluminum, means that companies in this industry are exposed to high risks: the balance sheet can take a lethal hit in case of sudden price changes. And these price changed do happen!
The graph above (source: lme.com) shows that Copper prices in 2008 dropped from $10,000/T to $3,000/T in just a few months. Wire and Cable manufacturers and distributors need specific and tight controls to minimize risk and exposure to the price volatility of metals.
Strategies to deal with price volatility risks
The strategies that companies in this market use, depend very much on the type of products they produce and type of markets they serve.
A manufacturer of building wire that has wholesalers as customers will manage their risks by periodically adjusting their price lists while hedging for the (relative constant) amount of copper in the company.
A distributor who works with spot prices has limited exposure to price volatility risks, and will only hedge in case of longer term contracts.
A manufacturer that produces cables for projects will make specific agreements about the price adjustments that will be done, e.g. based on actual LME or Comex prices.
Many companies will use a mix of these strategies to protect themselves against the risk of the metal price volatility.
Want to know more?
InnoVites CableERP is developed just for wire&cable distributors and manufacturers. It supports all these strategies that address the risk of price volatility. It helps our customers to mass update their sales prices, based on actual copper, aluminum or other material prices.
But InnoVites CableERP has much more! It has support length management in sales, logistics, planning and production. It comes with Drum management, Production optimization tools, Fiber management, etc.
Contact InnoVites today if you want more information!