Managing the Roller Coaster of Commodity Price Fluctuations
By Julie Ketter | March 13, 2022
Read Time: 4 Minutes
Wire and cable conductors are typically constructed of copper or aluminum and can be approximately a 20 percent material cost on commercial construction projects. Because these costs fluctuate and depend on supply and demand, how can you minimize the risk of metals volatility?
Copper Price Fluctuations
As wire and cable conductors are mostly composed of copper or aluminum, prices fluctuate daily as part of commodity trading. Commodities have value and can be traded on open markets, altering in price according to supply and demand, financial market volatility, or even politics. Many factors can affect the rise or fall of commodity metal costs, which is what makes it very hard to predict and, in turn, plan a project.
The primary metal used for electrical conductors is copper. Most NA-based manufacturers procure copper at a value based on COMEX copper exchange, which is traded on the Chicago Mercantile Exchange's (CME) futures market and is tracked daily. Traders agree to buy or sell a particular product at a given date in the future at a specific cost.
Why Contractors Struggle With the Price of Copper
When construction contractors estimate a project, they can’t predict what the price of copper will be when the product is required on the job site. It can sometimes take several months from the time a construction project is out to bid to when the bid is awarded. Additionally, the time from when the project is awarded to when the project is completed can take several months or up to two years or longer. During this time, metal prices are changing along with the cost of the cable. For example, early in the COVID-19 pandemic, copper prices hit their lowest levels since January 2016. Subsequently, from late March 2020 through early September 2021, prices nearly doubled, while they have since fallen nearly 25% from those highs.
This is where long-term copper contracts with a wire and cable manufacturer can come into play. A contractor will identify the amount of material required on the job site and the timing of those requirements. They will then work with the wire and cable manufacturers to estimate an average price of copper based on copper futures, material volume, and specific timing of the job or project. Once an agreement is reached, the contractor and manufacturer can agree on firm pricing throughout the project.
Copper COMEX contracts can be procured in 25,000 lbs. increments and will require a non-cancellable or non-returnable PO with releases throughout the term of the contract. Most manufacturers will offer contracts over 12 months but may vary depending on the mix of products and the manufacturer. Using copper contracts offers consistent pricing for the duration of a job or project.
The Best Way to Maintain a Stable Margin
With a copper contract, you gain some price protection, but your greatest expense on a project is labor. It is suggested that your construction labor cost percentage should be anywhere from 20-40 percent of total costs. If you're only accounting for direct costs, you can expect a significant amount of your total cost to be labor.
Value-added services provide a great option to lower construction labor costs and time. Service, with a plan to minimize the risk of copper volatility (contracts), provides a model to maintain a healthy margin. Maintaining a focus on value-added services will make wire installations more efficient with less labor than the competition. The better you are at streamlining your workflows, the better you will be at maintaining a stable profit margin. The top value-added cable management services include:
- Paralleling: Multiple cables cut the same length and taken up together on a single reel to allow installation in one pull
- Pulling heads: Allow multiple cables to be attached to a single pull line, resulting in a more efficient wire installation
- Cut to length services: Wire pulls staged for every phase of the job – processes in place to ensure the cut is measured twice and is accurate when it’s time to install
- Vendor managed inventory: With a vendor managed inventory (VMI), we stage and store the wire products and deliver just in time for use when ready for each phase of the job
Preparing for a Successful Project
Value-added services can help reduce labor costs, while copper contracts can help reduce risk throughout the length of a project. Construction stakeholders should be proactive in addressing the risks associated with potential price changes during bidding, contract negotiation, and procurement. Communication is the key to a successful project, and discussions regarding price escalation and labor-saving options should begin as early as possible.
Article originally published August 27, 2020 and updated for accuracy and relevance.
ABOUT THE AUTHOR
Julie Ketter, industrial wire and cable specialist at Wesco, has over 20 years of experience in wire and cable manufacturing and distribution. Julie uses her technical knowledge and sales expertise to provide the most cost-effective options available for contractors, EPC’s, and end-users.