Understanding Commodity Prices And Price Fluctuations
Wire and cable pricing has been all over the place these past couple of years. Contractors have seen costs jump quickly and unexpectedly, in a lot of cases eating up a large portion of margin from jobs. Knowing about and anticipating these price fluctuations could help you add to and protect your profits, plus it can give you a leg up in relation to your competitors. The following article lays out the causes of wire and cable price fluctuations and it lays out concrete actions you can employ to leverage this volatility to your advantage.
Reasons Why Commodities Fluctuate
The pricing of wire and cable and in particular power cable is very dependent on the cost of two main commodities: copper and oil. Almost all wire and cable is produced with copper rod, plus jacketing and insulation that also come from oil. As cable gets bigger in gauge size, it becomes more susceptible to big price fluctuations due to the large quantity of raw product needed for manufacturing. For example, 1000 feet of a small gauge Cat 5 cable might need about 8 pounds of copper rod. On the other end of the scale, 1000 feet of bigger gauge 350 mcm mining cable might need 5000 pounds of copper rod. When copper costs float between $1.20 per lb and $4.50 per lb as they have in the past couple of years, a buyer might experience an increase of $10 to $15 dollars in the Cat 5 order per every thousand feet. However, the price of the 350 mcm may spike by over $5000 – with potentially catastrophic effect on margins.
Commodities experts point to two likely causes for copper and oil price volatility. First is the growth of emerging markets like China and India. As these economies grow, they are requiring more of these primary commodities to feed their growth. This drives supplies down and causes price increases. Another reason commodity prices are volatile may be the impact of commodity market speculation. Pit traders often react to shortages by attempting to buy more of a dwindling commodity. Again, as the speculators buy more of the commodity, stockpiles fall and costs increase.
We see a similar cause and effect driving copper and oil prices downward. Towards the end of 2008, when the global economy slowed to a crawl, commodity supplies rose. When these supplies rose, costs dropped. However, these price drops also were the cause of another normal economic impact: miners and drillers cut back on production. In some cases, commodities producers were unable to produce these products at a profit, so they stopped investing in their employees and equipment – thereby reducing supply and driving costs back up. These price variations are simply a result of supply and demand factors.
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