所有你应该了解的有关线缆定价的事实

Part 2 in a 3 part series about copper and wire pricing (Part 1, Part 3).

Today’s topic is wire pricing. Here are 4 things you’ll learn today:

  1. Does copper volatility really matter that much?
  2. How often do we change prices?
  3. How do we know when to change prices?
  4. How are American manufacturers different?

Does copper volatility really matter that much?

Absolutely. The cost of copper in a box of Cat 5e has gone up by $35 in the last two years. No joke, that’s a real number. What’s even crazier is that the cost of copper in a single box of Cat 5e often changes by more than $5 in a week. Here’s why.

Some products have relatively fixed production costs. Each time the manufacturer goes to make the product, the cost per unit stays the same. A good example of this would be soda pop. Most of the cost of a $1 bottle of pop is branding, marketing, and transport. The cost of the raw materials in a bottle of pop; water, sugar, etc., is a few pennies, so even if they double in cost, it doesn’t have much of an effect on the total cost to make a bottle of pop.

Other products have variable production costs. The best example of this is a gallon of gasoline at the pump. Most of the cost in a gallon of gasoline is what the gas station owner paid for the gasoline, only a tiny fraction represents overhead and maintenance costs on the gas station. So, if the cost of gasoline on the wholesale market doubles, the cost of a gallon of gas at the pump is going to go way up.

These two products represent opposite ends of the spectrum. While soda pop is consists almost entirely of fixed costs, with a tiny amount of variable costs, a gallon of gasoline is the exact opposite; mostly variable cost, with a tiny amount of fixed cost.

Wire is somewhere in between these two extremes; some of the cost of a spool of wire is fixed and some of the cost is highly variable. To get a better idea of what’s going on, let’s look at the costs that go into a 1000 ft. box of Cat 5e:

  • Copper: 11 lbs
  • PVC: 9.5 lbs
  • Box/Packaging: 2 lbs
  • Labor
  • Shipping & Handling

Most of these – PVC, box / packaging, labor, and shipping & handling- are fixed costs. Technically, these costs do change over time, but they usually change gradually. A good example is the cost to ship containers from China to the U.S., which has changed quite a bit in the last year, but shipping is kind of like the sugar and water in the soda pop example above; it just doesn’t make much of a difference either way.

In recent times many of what we have historically considered fixed costs have been increasing rapidly. That includes PVC, cardboard, and FEP (the jacketing compound for plenum rated cables). In fact, DuPont, one of the main suppliers of FEP, just announced a 40% price increase effective March 1st.

That leaves a single variable cost: copper. Our previous article talked about copper and how volatile copper prices are (clif notes version: they’re insanely volatile), which suggests a question: do copper prices really affect the price of wire that much? You betcha!

Let’s take a look at how this applies to our Cat 5 example from above:

Cat 5e Copper Cost

Woah, did you see that? The cost of copper in a box of Cat 5 has gone up by $35 in the last two years. No kidding, those are real numbers! What’s even crazier is that the cost of copper in a single box of Cat 5 often changes by more than $5 in a week.

So, a box of wire has a bunch of fixed costs (PVC, box, labor, shipping & handling) and a single, huge variable cost (copper). Our cost structure reflects this. Each product we make has a base cost, which represents the PVC, box, labor, and freight; and what we call an adder, which is tied to the market price of copper.

How often do we change prices?

Historically, we’ve changed prices about 2 times per year. Since the price of copper has become so volatile, 8 weeks has become the typical interval.

These two facts: 1) that each production run takes about 8 weeks to reach us, and 2) that the costs for all the products on a given production run are based on a single copper price, determine when and how often we have to change prices.

For us, and for most other overseas wire manufacturers, prices change at most about every 8 weeks. Recently we’ve been at about 12 weeks between updates, but some of our overseas competitors have been at 4 weeks. Here’s how tis all works

We build all of our bulk wire in Chinese factories and then transport it to our warehouses in the U.S. via boat. As a result, we do all our production runs in container-load increments. If we sell a bunch of 16-2 speaker wire today, we can’t just call down to Jeff on the factory floor and tell him to make another 10,000 feet.

Instead, every few days we run inventory reports which tell us how how much of each product we need to schedule for production. From there, a work order is sent over to our factory. They typically take 3-5 weeks to finish the production run. Then it spends another 2-3 weeks on the water, in ports, clearing customs, etc. – the whole process takes about 8 weeks, or 2 months.

I just made that process sound way simpler than it actually is. It’s made much more complicated by several things: 1) we make several hundred different products, 2) each product has a different run rate (how many units we sell each month), 3) we’re building product today that we’ll be selling in 60 days, which means that if we don’t build enough, we’re kinda between a rock and a hard place. I could go on, but you get the idea.

We’ve got production runs going all the time. Remember how we said part of the cost for a box of wire is based on the current price of copper? Well, we buy all the copper for an entire production run the day we give the factory the go ahead. This means that the cost of all the products on an entire production run are based on a single copper price – the closing cash price of the LME copper market from the previous day.

At any given time, we have an 8 week supply of product in various stages of manufacture. So, when we sit down to set prices, we know what our average cost of goods sold will be for the next 8 weeks. This advance knowledge of our cost structure allows us to set prices at a level that we’ll comfortable with for at least the next 8 weeks.

Beyond 8 weeks it’s a toss up though. It’s not uncommon for us to go well beyond 8 weeks between prices changes, but it just depends on what’s happening in the copper market, which dovetails nicely into the next section…

How do we know when to change prices?

When the price of copper falls outside our range of reasonable profit margins, we have to change prices. Each pricing level has a range of comfort for us, which is expressed as the actual copper price our prices are based on, plus or minus $.30/lb.

A real life example from about 6 months ago is $2.95. Again, plus or minus $.30/lb. So, as long as the price of copper stayed between $2.65 and $3.25, we didn’t need to change prices.

How did we come up with this $.30/lb range of comfort? Lots of experience, mostly. If copper is toward the top of this price range, we make a little less money, because the cost of our products go up, and if it’s near the bottom of this range, we make a little more money, because the cost of our products go down. Over time, these average out and we’re in a comfortable spot.

If we get outside of this range though, we know from experience that we’re either making too much money and our prices are no longer competitive, or we’re not making enough money to keep the doors open and the lights on. So, it’s when copper get’s outside of this +/- $.30/lb. range of comfort that we know it’s time to move prices.

Let’s play with a an example scenario so you can get a good idea of how all this works in practice. Let’s pretend we’ve just set prices knowing that our cost of goods sold for the next 8 weeks will be based on an average copper price of $3.95/lb. That gives us a comfort range of $3.65/lb. through $4.25/lb.

If we start a new production run at $4.10/lb. copper, we don’t need to move prices, because we’re within our comfort range. If, however, we start a production run at $4.30/lb., we’re probably going to need to move prices.

Why only probably? Why not for sure? Well, the next two production runs after that might be below $3.95 copper and the average of the three might still be within our comfort range. Whenever possible, we try to keep prices stable.

How are American manufacturers different?

We mentioned earlier that the frequency of our price changes is based on how long it takes us to build and transport a production run? Well, the result – that we typically go at least 8 weeks between price changes – is fairly typical for all wire companies that manufacture overseas. We don’t all change prices in lockstep, but pretty much all of the overseas manufacturers are changing prices within a few weeks of each other.

American factories, on the other hand, are a whole different story. They don’t have 8 weeks of product in progress at any given time. Instead, if they’re running low on 16-2, they can just call Steve down on the factory floor and tell him to make another 10,000 feet. That’s for the products they stock. Because their turn around time is so short, they choose not to stock a lot of stuff. Instead, they just make it when a customer orders it.

For these reasons, most American wire manufacturers operate on what’s called spot pricing. This means that the price you pay is based on the price of copper on the day you place an order. In other words, there are no price sheets. If you need a price, you call ‘em and they give you a price, and that price might only be good for a few days.

That’s how the majority of the American wire manufacturers work. Some of them do publish price sheets, but when they do, they usually change prices every 15-30 days. Why? Simple, they only stock 15-30 days worth of inventory, which means that, unlike us, they don’t know what their cost of goods sold will be in 2 months. So, they can set prices, but those prices will only be good for a few weeks, then they have to set new prices.

Outro

Hopefully you’ve gained some insight into how pricing in the wire industry works.

Here are 4 things you’ll learn in the next article:

  1. How do we know what to change our prices to?
  2. Why are some manufacturers always higher/lower than others?
  3. How does product quality make a difference?
  4. Are some prices too good to be true?
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