Material Price Variation in Contracts
There are many sectors of the cable market where, because certain key raw materials have always constituted a large element of the overall cost of a cable, procurement contracts contain material price variation clauses (also known as “price pull-through”). These clauses specify how the cable selling price will be adjusted when the price of the key materials change. Usually the price variation is limited to the conductor, copper or aluminium, but sometimes the principle has been extended to cover other key raw materials. For example, the selling price for ACSR might be related to both the price of aluminium and of steel wire.
Hollow Prices Plus Material Cost
With this approach, cable selling prices quoted by the cable supplier to customers are essentially “hollow” prices, to which key materials are then added at the currently prevailing price, according to how much material is used in a specific cable design, to get the total price paid by the purchaser. With this type of adjustment mechanism in place, negotiations between the cable supplier and the purchaser can focus on the element of the total price that is within the control of the cable-makers. It does, however, mean that the metal price risk is transferred from the cable supplier to the purchaser, a situation that some end-users may be very reluctant to accept.
Risk in Quotations
When a firm order is received, cable producers can use metal market trades to eliminate risk due to metal price changes. However, price quotations against tenders are more difficult to handle. Volatile material prices make it difficult for cable suppliers to offer quotations for cable prices unless material price variation is included. Slim margins can be wiped out by material price changes. Though mechanisms to contain this type of risk exist, the cost of buying options may be prohibitive in practice.
Power Cables and Telephone Cables
Utility power cables and telephone cables are good examples of product sectors where in many markets material price variation has traditionally been used. Because this approach has been in place for many years, it is widely accepted and non-controversial. Procurement managers in power utilities and telcos are familiar with this approach. Even so, this approach is not used in all markets around the world. For example, in China cable companies have sometimes quoted fixed prices on power cables and telephone cables. In more normal times the risk through exposure to metal price variations might have been considered acceptable, but in the highly volatile metal markets of recent months, upward price movements have generated big losses on fixed price contracts.
Extension to New Products
During a period of high and volatile metal prices, such has been experienced in recent months, cable-makers are likely to find it very necessary to move to variable price contracts, even in some markets where this approach has not been followed in the past. In data cables, for example, copper was much less significant an element of cost when the metal price was below US$2,000/tonne than it is now, with copper above US$6,000/tonne. However, it is difficult to persuade customers who are not used to quotes containing material price variation to accept this approach.
Need for Transparent Material Prices
One necessary condition that must be met in order for material price variation to work to the satisfaction of both cable supplier and purchaser is the availability of transparent price information for key raw materials. The price of metals meeting defined quality standards (e.g. Grade A copper cathode or aluminium billet), which are available through commodity trading exchanges, are a good example of this. Since these prices are publicly available, there is reduced scope for disputes between suppliers and customers about the basis of price adjustments. However, not all materials used in cable-making are commodities openly traded on exchanges. Even so, there may be other benchmark market prices (e.g. the list price of a leading material supplier) that are available to both parties, but in other cases key material prices may be confidential for commercial reasons.
Frequent Price List Changes
In other market sectors where material price variation is either impractical or unacceptable, the mechanism adopted for price adjustments is the published price list. This mechanism is often adopted for general market products such as building wire: the published price list sets a benchmark level, with larger volume purchasers receiving discounts against the list price. When material prices change by a significant amount, selling prices need to be adjusted and the price list re-issued. In the days when price lists had to be printed and circulated this could be an onerous administrative task, but it is less of an issue now that price lists can be issued electronically.