Costing the Earth
In last month’s news pages we ran a story about the rising cost of raw materials and how it is becoming a major concern for industry. This month we hear from two manufacturers whose product output and costs feel the full force of the raw material situation.
Andrew Taylor, Managing Director of Yuasa Battery Sales (UK):
“Around 18 months ago, the price of lead on the London Metal Exchange (LME) was $1,000 per tonne but during 2007 this increased to around $3,000 per tonne with a price surge in early October to $4,000 per tonne! This threefold increase in about 12 months makes it is easy to see why battery prices have been increasing. Some years back, supply of lead far exceeded demand but now, with the emergence of the Chinese and Indian economies, demand massively exceeds supply. Under these circumstances, lead prices rose to their highest levels in 2007 and have also stimulated speculation making prices rise still further over short periods of time.
“Like most metals on the LME, lead prices are quoted with three different prices: cash, 3 month and 15 month forward purchases. Normally the 3 and 15 month prices are significantly lower than cash terms although recently the gap has narrowed indicating the market’s expectation of continuing high prices or even more increases to come. Currently, the 15 month price of lead is only around 2 to 3% lower than the cash price; however, manufacturers will have purchased lead for production in advance when lead prices were rising so battery prices are not likely to fall this year if at all.
“Shortages of lead are also adding to the problem. The impact of lead shortages and prices on market stocks of batteries throughout the UK industry is significant. Stocks, at all levels of the market – both manufacturers and distributors – have fallen. Both face the increased costs of working capital and uncertainty about the future price of the metal (not helped by the credit crunch currently afflicting the world’s financial markets). If we add to this analysis the fact that numerous Far Eastern producers have already halted production, the outlook is clear: battery supply will continue to be tight this year.”
EPA also spoke to Christian Velten-Jameson, Nexans’ Corporate Vice President of Finance. As the largest consumer of copper in the world, cable manufacturer Nexans are well-placed to comment on how the prices of copper impact their business. We asked him how he felt copper prices were likely to act throughout the year:
“To be honest we don’t know, but it is how we go about not knowing and how we live with that lack of knowledge that is important. Our assumption is that copper prices will remain high, and by that I mean anywhere between $6,500 and $8,000 per metric ton. All that we can say is that we believe the market will remain volatile with swings of up to $400 in one day of trading being possible.
High prices are largely a result of pure demand, predominantly from Asia. Volatility has been caused by a large amount of liquidity in the markets, with fund managers looking for alternative sources of investment to the traditional stock market investments. Many funds have invested in base metals with a view to making a profit on the movement of price, rather than an interest to hedge as we do in manufacturing, and it is this buying and selling that creates much of the volatility.
In some industries when the price of metal increases, manufacturers see their margins dwindle. However, within the cable industry the price of the metal content of the cable, be it copper or aluminium, is passed on to the customer. At the high voltage and infrastructure end of the market, this will be done almost automatically as the price is fixed when the contract is awarded. At the low voltage end, the prices will not be adjusted on each order but still there will be very regular adjustments up to several times a month, when the price of the metal content of the cable varies.”
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