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Commodities are the latest investment rage and this combined with increased worldwide demand continues to drive relay and switch material costs higher. A slackening of market demand as the U.S. economy slows puts a downward pressure on switch and relay prices as costs go up. The U.S. dollar weakens against the euros making our exports more competitive but also putting upward pressure on the prices of commodities, such as oil, that have their global prices fixed in dollars.
This unusual set of economic circumstances will be examined as to how it may influence the global switch and relay markets.
In March of 2005, May of 2006, and April of 2007 this column looked at rising material costs. A chart similar to the one below appeared in those articles and has been updated. The graph shows the indexed cost of raw materials used to produce switches and relays from Q1 2003 through Q1 2008. The metal and oil data was obtained from the New York Mercantile Exchange and resin pricing from Plastic Technology magazine.
Prices for copper and silver, key ingredients for switches and relays, lead the pack in cost increase over the charted period. Copper prices spiked in the second and third quarters of 2006 then fell in the last period only to bounce back up in Q1 of last year. Copper now costs over 5 times as much as it did 5 years ago. Silver is a close second costing over 4 times as much as in 2005. Crude oil price gains relaxed between the summers of 2006 and 2007 and since have motored higher. The bright spot is the price of Nylon 66 that has stepped up once in five years as reported by Plastic Technology magazine. The two forces of worldwide demand and speculation keep pushing copper, silver, gold, and oil prices upward.
The blue line in the graph above shows the Switch Tracks price index for component switches and the green line the Relay Report price index in North America. In 2006 switch prices did move up. Then declined in 2007 as demand fell off and price competition increased. Relays had a different experience declining in selling price from Q1 2005 through Q3 of 2007 with a healthy increase in Q4 of last year. Perhaps a sign of capitulation by the relay manufacturers in the need to pass on increased costs.
The table below shows the percentage change in average selling price by switch type between the third quarter of 2007 and the same quarter in 2006. All but snap action switches realized decreases in pricing over a one year period. All of the price gains realized in Q4 of 2006 were lost and more as the total for all types came in 4% lower than the previous year.
Q3 2007 versus Q3 2006
The table below shows the change in relay pricing by type from Q4 of 2006 to Q4 2007. The much larger electromechanical segment and a mix shift to lower cost solid state relays drove total relay prices up 3%.
Q4 2007 versus Q4 2006
The dollar has weakened, or the euro has strengthened, to the point that it now takes about $1.50 to purchase a euro. Back in the late 90s when the European Union devised a common currency for its member countries they wanted a euro to be about equal to a U.S. dollar which would make trade between the two easy to understand. At the turn of the millennium, when the euro first debuted, it cost about $0.85 to $0.90 to purchase one of the new euros. In 2003 the euro began its climb to current levels and the graph below shows the progression of over the last three years.
But is a weak dollar all bad? It should, and generally does, make our exports less expense, but not always. To make a comparison let’s look at North American and European Switch Tracks data for snap action switch prices. The table below shows a graph of the average selling price index of snap action switches in both markets.
Through the first half of 2006 both the North American (solid red line) and European (solid blue line) remained fairly the same as prices gradually increased. The prices leveled in Europe and kept rising in North America until they met again in Q3 of last year. The solid lines are based prices denominated in native currency.
The dashed blue line shows the European price index if converted to U.S. dollars at the exchange rate of the time. This shows that the European market was far more competitive and therefore less attractive than the North American market when denominated in dollars versus euros.
If I or anyone else could predict the future with certainty they probably would not share the information. Since I am not certain, here are my thoughts.
When gasoline first reached $3.00 a gallon there was a noticeable drop in demand. The shock of $3.00 gasoline is not what it used to be. The next horizon would be $4.00 a gallon and this is still less than Europeans pay. Gasoline prices have become a function of refining capacity and not just crude oil prices. So I wonder if refiners have incentive to spend money to increase supply, or, invest less and sell for a higher price.
Global demand, primarily due to growth in China and India, has driven up the cost of copper. Both of these economies are expected to continue to grow by almost 10%. Businesses and the government should continue to invest in buildings and infrastructure, pushing the need for copper wire and tubing higher.
The cost of relays and switches has risen. The selling prices for switches have moved up but lately retreated on softening demand. Relays selling prices ended a two and a half year slide late last year. Manufacturers have cut costs by moving operations to low cost parts of the world and cutting overhead so there is hardly any meat left on there bones. It seems that increasing prices will, if it hasn’t already, become necessary.
Corporate spending dropped dramatically in the fourth quarter of last year and has remained soft in the first quarter of this year. Companies are holding on to their cash or buying back shares reluctant to invest to increase capacity or increase productivity for fear of a recession. This combined with no clear bottoming of the housing crunch or up tick in the automotive market will keep demand for many manufactured goods down, thus increasing the pressure to keep relay and switch prices down.