Adapting to the volatility of copper prices
07 Aug 2006
All of us, as individuals and as members of the electrical industry, have felt the effects of rising commodity prices over the past 24 months or so. We have all seen how the rising world oil price has increased the price we pay for petrol at the bowsers. Other petroleum based products, such as plastics and rubber based materials, have also suffered price increases. Transport costs are on the rise. These price increases are due to increasing demand for oil, particularly from China and India.
The same economic influences have also driven the price of metals to unprecedented levels. Copper, nickel and lead prices, amongst others, have all risen to record highs, and remain close to those historical peaks at present. These high prices have been further driven upwards by speculative buying from hedge fund operators looking to cash in on the market.
These metal price rises have had two major effects on the electrical industry.
The first is the positive situation of increased investment in Australia in mining, mineral processing, and road, rail and ports’ infrastructure. Australia is a commodity rich nation, and the high prices available for coal, iron ore and other metals is delivering strong profits to our leading resource based companies, allowing them to invest to increased production capacity and efficiency. These projects require substantial amounts of electrical products and experienced electrical contracting expertise - all positive for our industry. The contracting fraternity is certainly busy, especially in Western Australia and Queensland where industrial investment is concentrated. In fact, there is such a lack of skilled labour that there is a queue of major projects waiting to be commenced.
The second flow-on effect is the increase in manufacturing costs of metal based electrical components. Copper is a prime example. Its price has risen from $2900 per tonne in December 2003 to a peak of $11,800 per tonne in May 2006, an increase of 400%. Between March and April this year alone the copper price increased by 70%. Copper is an excellent conductor of electricity, and so is used in components such as motors, contacts, and of course, in cable. Copper can constitute over 70% of a cable’s cost, meaning that the recent severe increases in copper prices have given to sharply rising cable prices. We at Olex did absorb some of these increases, but, when faced with such steep and unrelenting rises, had no choice but to pass them on.
Given the level of copper price volatility we have recently seen it is impossible to predict where copper and other metals prices will go in the coming months and years. Therefore, the message to electrical contractors is to negotiate project rise and fall clauses in their commercial agreements wherever possible to protect against these unpredictable price movements. On sizeable projects Olex can lock-in copper at a set price to give you a fixed cable cost for the period of your project giving you price peace of mind about your costs and profit. Certain conditions do apply but these are not onerous.
There is no escaping the reality of higher and fluctuating commodity prices. The challenge is to adapt our commercial practices to protect ourselves from their volatility and work with suppliers who can help you. It can be done! Meanwhile, we should also focus on the economic benefits that these prices bring the economy, both directly and indirectly. Let’s hope they last sometime for the benefit of the industry.
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