The Impact of the Cliff-Diving Prices of Commodities

With a drop of over 35%, copper is having a profound impact on distributors, especially with end of year coming up, and the future doesn’t look too good either.

In less than a month copper has fallen from $3.32 on September 2 to $1.85 as of yesterday, October 22, and based upon some marketplace input and conversations with purchasing individuals in other industries, it appears that the decline will continue. This is because of reduced worldwide demand, probably some financial manipulation (hedge funds), the slower time of the year and upcoming Chinese New Year.

This week we’ve heard from over 20 distributors who are asking “what do you know?” and “What would you recommend?” We’ve shared our observations and recommendations with them. From a broad perspective this means:

• Every distributor’s inventory is overvalued.
• Your purchasing system is buying more material than you need (min/max is based upon historical, not marketplace conditions).
• Distributors are making less GP dollars on their wire sales than previously, while doing the same amount of work, even if they are selling the same number of feet. The same GM% on a lower dollar amount is lower GP dollars, lower sales commissions, and lower profit for the distributor. This will affect lower distributor net profitability (industry-wide) and may lead to expanded expense management practices.
• Distributors who use LIFO accounting practices may face a significant tax bill at the end of the year. LIFO is great in an appreciating market, but …

Oh, and while this is impacting copper now, it will migrate to other commodities … with oil falling, what will that do to plastics? Steel?

So what are you doing to manage your exposure? What help are you getting from your manufacturers? Manufacturers justified price increases based upon commodity price increases, are they reducing them? Can someone spell SPA?