If you’ve stopped at a gas station to fill your tank over the past few weeks, you’ve probably noticed your dollars aren’t taking you as far as they used to… literally.
Thanks to a dramatic rise in crude oil prices, Americans are on pace to pay the highest price per gallon for fuel ever, closing in on the previous average high of $4.10 set in June 2008. At the same time, the cost of copper is rising to all-time highs due to increasing demand for materials and waning inventories, approaching stockpiles near 2005 levels.
What do the two have in common, you ask? For copper wire manufacturers, distributors, and end users – a lot. While gas prices may translate to fewer dollars in all our pockets, higher crude oil costs have a far-reaching effect that impacts everything from sourcing materials to production, logistics, and future investment.
Like most materials, crude oil and copper are influenced by several factors. What might seem like a trivial issue somewhere on Earth can eventually have a Butterfly Effect that drives up prices and puts a clamp on the global supply chain.
What causes these fluctuations? The answer is anything from logistical issues that drive up shipping costs to increased demand to meet new green initiatives. Economic factors, including over or underinvestment in sourcing materials, can also dictate the price you pay for goods and services.
For example, when the COVID-19 pandemic first set in, and people were working from home, oil producers had a surplus of oil and not much demand. As a result, the price of a barrel dropped alongside gas prices, sinking as low as $1.77/gallon in April 2020. As demand increased, so did the price of a barrel of oil and what we paid at the pump.
As the world looks on at the crisis in Ukraine, the ongoing situation has had a ripple effect on many of the raw materials used to manufacture copper wire. Russia is a global supplier of crude oil, but with the threat of sanctions and other restrictions, the strain on supplies has caused the price for a barrel of oil to skyrocket.
Oil is used to create the polymers and plastics used to coat copper wire, giving it the ability to resist corrosion, moisture, heat, and gas. Coatings like PVC (polyvinyl chloride) and polyethylene are also required for Kris-Tech wire to receive UL (Underwriter Laboratories) approval and maintain top-quality performance out in the field.
When the supply chain is stressed, raw and finished materials become pricier to find and create, forcing manufacturers and distributors to pass those costs on to the next step in the chain. For the end user, that usually means price hikes for value-added products like finished copper wire. Unfortunately, until the world devises a plan to address the impact of decreased oil production, prices could continue to rise.
Like crude oil prices, copper has been squirrelly, jumping from $3.67 at the start of 2021 to almost $5 in March 2022.
There are several reasons for the sharp incline, including the amount of above-ground copper available for manufacturing, which has hit its lowest supply since 2005. Copper is a great electricity conductor, cheaper compared to other electrical materials, and has a wide variety of applications. The reddish-brown metal is in everything from consumer electronics and car parts to cabling and cookware.
It’s also a finite resource, which means supply will eventually dwindle in the face of increased application and demand. China is the world’s leading electronics manufacturer and the largest copper consumer, and as more focus is put on the green revolution, including the rise of solar power and electric vehicles, the need for copper will likely grow.
Although China is a copper producer, it doesn’t come close to what Chile and Peru produce annually. The number one and two producers, respectively, mined about 7,800 ktonnes of copper ore in 2021, and have plans to continue ramping up production into 2022. However, the possibility of political unrest in both countries may temper expectations somewhat.
Rising prices are a part of life but can pose potential issues for the entire supply chain from start to finish.
If crude oil prices rise over time, it impacts everything from the cost to extract and deliver raw materials to manufacturers to value-add pieces like PVC and polyethylene jackets found on UL-rated copper wiring. Once the wire is shipped, distributors must pay more for the final products on top of higher shipping costs. Finally, distributors pass the added expenses on to contractors, electrical companies, and others who need wire to complete projects.
As we’ve seen in the past, crude oil prices are dependent on several factors. The price per barrel may remain high until the United States and other western nations can figure out how to increase active oil reserves.
For copper, many of the same conditions apply. Higher demand and low supply are making it more expensive to get raw materials. The metal is typically fashioned into higher profit items like copper wire, computer parts, and for green technology applications like photovoltaic (PV) wire and electric vehicles.
“Given the current dynamics in the supply chain, this represents an opportunity for manufacturing and distribution partners to lean into their relationships,” Jeff Manzo, Vice President of Business Development for Kris-Tech, said. “By doing so, it further opens lines of communication while creating visibility around forecasts and/or upcoming needs. As a result, it better positions partners to shift away from being reactive and take a more proactive approach to alleviate constraints in their supply chains.”
Another impact may be tied to lead times and how distributors approach their supply chain strategy. As materials rise in price and demand grows, lead times are likely to get longer as it takes more time to get materials, turn them around, and ship them out.
As lead times grow, distributors may need to look for products from multiple vendors, pay a higher price for the same amount of product, or wait longer for shipments to arrive. End users may also pay higher prices to compensate for added costs incurred throughout the supply chain.
Electrical distributors may find themselves in a difficult position because of the higher prices. Should they sell their products at the current pricing or pass the added expenses on to the end user? How will higher costs impact their ability to make future purchases? Will they have to reassess those purchases and buy less, or take the hit and keep buying at their current interval?
At the end of the day, higher prices pose a problem for the entire supply chain from start to finish. No link will go unaffected, and as the world continues to brace itself for continued fallout from the Russian invasion of Ukraine, prices may stay like this for a while.
Copper prices may edge slightly lower if there is an uptick in production, but the price has risen even with more mining taking place in Peru.
“Product availability continues to be a central theme in the electrical industry,” Manzo explained. “A critical opportunity for distributors is to align with a manufacturing partner who listens to your needs, creates value-based solutions to support these needs, and can execute on those commitments. This level of customer centricity and flexibility is engrained in everything we do at Kris-Tech.”
Despite everything happening in the industry today, we’re prepared for the future and ready to meet challenges head-on. Lead times and prices have increased for many vendors in the space, but we passionately believe our dedication to quality and customer service allows us to keep everyone we serve in the loop every step of the way.