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Materials Prices on the Rise – Buyers Beware?

Just weeks ago, the electronics supply chain wasn't too worried about price increases, with the possible exception of tantalum capacitors. The global supply of tantalum has some uncertainty attached to it because of movement away from so-called “conflict minerals.” (See: The Great Congo Paper Chase and Tight Supplies, Tantalums & 2011.)

Within the past few weeks, though, there has been a rash of headlines concerning the rising prices of raw materials such as copper, aluminum, nickel, iron, gold, and silver. If this trend continues, component buyers should expect to see suppliers try to raise prices.

If component makers try to pass increased raw materials costs on, this isn't unreasonable. Asian trade journal DigiTimes this week reported that PCB makers are having difficulty passing materials prices down the supply chain:

    Despite price hikes by upstream material suppliers, PCB makers are finding it difficult to pass increased cost downstream. PCB material prices began to rebound from the Lunar New Year in 2010. CCL quotes rose by nearly a 5% average per month during 2010, and fiber glass yarn and fabric prices have also climbed with many producers closed down during the economic crisis in 2008-2009 helping to limit supply.

    PCB makers were able to raise quotes in May and June 2010, but were unable to do so again in the third quarter when material prices soared.

    The material price hikes are largely due to an over digestion of inventory. Taiwan-based copper foil maker Co-Tech, for example, nearly emptied its inventory in December 2010 and has since bumped up quotes by 5-7% in January and a further increase is likely in February and March.

    Some PCB makers are in talks with downstream clients about possible quote increase but are keeping the negotiations low profile.

According to reports from The Wall Street Journal and the BBC, materials prices are continuing on the upswing.

The Wall Street Journal reports :

    The world's biggest iron-ore miners are running at record production rates and boosting prices, maintaining the upward momentum begun in earnest in the second half of 2010. Steelmakers, the major buyers of seaborne iron ore, are taking it on the chin, warning in their coming financial results that raw material prices will sap their profits for a better part of the year.

    The world's third-largest steelmaker by sales, South Korea's Posco, said this month that its profit fell 60 percent in the final quarter of 2010 from the year before, due in part to a steep rise in prices for iron.

Prices of copper foil of all specifications will likely rise to US$3.7 a kilogram from $3.3 to $3.7/kg currently, according to the BBC:

    The price of copper has hit a new all-time high, rounding off a year in which industrial metals rebounded strongly.

    It peaked at $9,631.75 per metric tonne on the London Metal Exchange, its highest ever level, before falling back slightly. The metal has risen 30 percent in value this year, with half of that rise coming in the last month.The rally has been driven by the global economic recovery and most countries holding low stockpiles.

    Demand for copper and other industrial metals is outstripping supply, as industrial output by the emerging markets economies surges ahead of their pre-recession levels.

    Manufacturing in Europe – and even in the US according to recent data – has also picked up, the latest data suggests.

    In most parts of the world, future copper prices suggest there will be further near-term rises in the metal's value.

    Global copper inventories are down by about a third this year, and traders say that with supplies so tight, the risk is that prices could rise more rapidly if the recovery gathers pace.The major exception to this trend is China, which is sitting on a large stockpile that it built up during 2009, but is expected to be used up during the coming months.

    Copper is not the only industrial metal to do well this year. The price of nickel is up by a quarter, while tin has risen more than 55 percent in 2010. And other commodities have also been climbing in what has been a particularly strong year, though most prices still remain well short of levels seen during the commodities surge of 2007-08 that helped precipitate the global recession. Meanwhile, precious metals have shot up amid fears over the debts and loose monetary policies in Europe and the US. The price of palladium – a precious metal used in catalytic converters – rose 94 percent this year.

There's another aspect to this buyers should keep in mind. Nobody wants to see prices increase, particularly in this market. However, the electronics supply chain, with few exceptions, has not sustained a considerable price hike since pre-2000 — right before overcapacity sent component prices on a decade-long decline. The prices of tantalum capacitors, according to suppliers and distributors, have only now reached the same level as they saw in 1999. The recent uptick in materials prices may not have an impact on component prices in the short-term, but if the trend continues, suppliers may try to make up for some of price erosion of the past 10 years.

I'm not saying that suppliers will be opportunistic — price hikes are a reality sometimes. But suppliers, distributors, and buyers should continue to work closely together to make sure that any increases are valid, reasonable, and not disproportionately heaped on any one partner in the supply chain.

12 comments on “Materials Prices on the Rise – Buyers Beware?

  1. DataCrunch
    January 21, 2011

    Hi Barbara, not good news.  Unlike gasoline prices that can fluctuate based on the price of oil, which the costs are then passed to the consumers, the consumer electronics industry does not have that luxury.  There is a certain expectation of what pricing to expect in consumer electronics and a certain threshold that pricing can bear. 

    So two possible outcomes based on your report: higher prices or lower margins.  Both are not welcome news.

  2. hwong
    January 21, 2011

    The prices will certainly go up because of the exchange rate and alot of these materials will be from China.  There has been talks that US is forcing China to increase the exchange rate so that many imports will become alot less affordable. As a result, the demand for the end product may go down if elasticity of the product is high or that American people has increase in average salarly. But that's unlikely going to be the case for awhile.

  3. Anand
    January 21, 2011

    Lets  not call this oppurtunistic, price is a phenomenon these days. With oil touching nearly 100$ and thus increasing the prices of most of the commodity prices its high time electronic industry take care of this price rise and pass it on to the end customer. Nothing wrong in the price hike in accordance with inflation.

  4. Parser
    January 23, 2011

    Working closely by supplier, distributors and buyers is a result of business arrangements. The opportunistic element is so strong that no good will be sufficient for prices to be reasonable. Hopefully the natural market elements will contribute to price stabilization. Monopoly would be bad or good only for one company or nation. 

  5. Eldredge
    January 23, 2011

    Material costs are definitely affecting components that use copper, silver, and other precious metals.

  6. Ken Bradley
    January 23, 2011

    Barbara, good article.

     

    Buyers need to keep in mind that even with commodity prices in metals on the rise that their component prices need not move proportionately with the commodity’s increase. These increases, along with labour inflation in places like China, give suppliers an excuse which they can use to argue for more. Buyers are (or should be) aware of the cost breakdown of their procured components and can calculate the maximum justifiable increase. For example, if copper is 10% of a components cost and it increases 10% then the justifiable increase is 1%.

     

    The companies who have driven suppliers to minimal acceptable margin levels will see maximum justifiable price increases; those that haven’t have potential to avoid increases if they can create adequate leverage for their negotiation. Remember, the cost and price relationship is not fixed.

  7. Mydesign
    January 24, 2011

          Barbara, I think that the increase in the cost price of raw materials is not good news for the supply chain industry.  More over this may force the industry to cut down the production line also, which will in turn increase the cost of production and other associated costs.  Recently we had seen the hike in wage structure also with the changes in taxing policies of government.  So all these changes going to be affect the industry very badly, which may end up in wind up of small production line industries. At the same time others also has to struggle well for the existence. In such a scenario, we have to think seriously about alternate mechanism to beat the cost factor and to avoid dependencies.

  8. Barbara Jorgensen
    January 24, 2011

    Ken's point is a very good one–a well-informed buyer is the best defense. The other key word is “justifiable”–it's not unreasonable for suppliers to pass price increases down through the supply chain, but they cannot be arbitrary. A good partnership should include the kind of information buyers need to track raw materials and price fluctuations. If not, the information is out there–many environmental mandates require declaration of what materials are contained in a component–or better yet, seek a partner that will share that information.

  9. SP
    January 25, 2011

    Yes I agree the organizations who are interdependant for raw materials must work in some understanding for price raise. Aren't they governed by group of companies or board of directors?? But increase in price of minerals is bound to happen with the way companies are digging out minerals and the world is consuming, there would be a time when mother earth may be depleted from all its natual minerals. I cant imagne what would be the cost of minerals at that time. Hope our future generation get to see some precious minerals…

  10. Taimoor Zubar
    January 26, 2011

    Interesting points Barbara. Considering this situation and anticipating future price hikes, I believe some companies may consider procuring the raw materials in advance and storing it for future. How would you consider this strategy?

  11. Barbara Jorgensen
    January 26, 2011

    Hi TaimoorZ–In general, I don't think stockpiling is a good strategy because of the risk that the market could reverse quickly. (That's the whole idea behind commodities trading–scary.) For the electronics supply chain, I think it would depend on the relationship between the raw materials suppliers and component makers. For example, if the raw materials suppliers have a reasonable expectation that cancelled orders could be resold at fair market value, then components makers might want to up their orders or move to the front of the line. I think there's a low risk that anyone will get “stuck” with the material since most are in constant demand. However, if the materials have to be processed in a specific way for electronics, that narrows the resale market and increases risk.

    In general: commodities are low-risk.

    Proprietary products: high-risk.

     

  12. Taimoor Zubar
    January 26, 2011

    I think the risk of components becoming useless or obsolete is a major factor. Apart from it, there is also the risk that prices in future may go down because of an increase in supply. This too might discourage companies from stockpiling.

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