Download Hot Wire - December 2011

HOT WIRE
®
News and Economic Outlook for the Wire and Cable Industry
Dear Friends of IEWC, here is my account:
The Wire Index held mostly flat throughout November, excluding a nearly 10% dip during the Thanksgiving holiday week in
Industry News the US. The Index tracks the weighted stock price of six publicly-traded wire and cable manufacturers and distributors
based in the US and is benchmarked such that the average value during the second half of 2006 equals 100.
Accusations of price fixing among major automotive wire harness suppliers gained some attention in early 2010 after FBI agents searched the
Detroit offices of Yazaki North America and the Japan Fair Trade Commission raided the offices of Furukawa Electric, Sumitomo Electric
Industries and Yazaki Corp. In Europe, the European Commission made similarly unannounced visits later that summer to the offices of Lear
Corp, another supplier of wire harnesses to the automotive industry. The internationally-coordinated prosecution yielded its first guilty pleas in
late September of this year, when three executives of Furukawa, headquartered in Tokyo, plead guilty to US Department of Justice charges of
a price-fixing and bid-rigging conspiracy lasting from 2000 to 2010. The company will pay a $200 million fine and the three Japanese national
executives will serve time in US prisons ranging from 12 to 18 months. Following this first successful prosecution, a number of car dealers
and individual buyers have filed civil suits naming Furukawa, Yazaki, Sumitomo Electric Industries, Delphi Automotive, Lear, Leoni and S-Y
Systems Technologies as plaintiffs. The suits seek to recover a portion of the cost of new vehicles purchased during the time of the
conspiracy, which may have unfairly inflated vehicle prices paid by dealers and consumers. With most brands of cars affected by the actions
of these tier one suppliers, the compensation awarded as part of these suits has the potential to grow to a very large figure.
As recently as November 23rd, a class action suit filed by Martinez Manufacturing on behalf of similar “direct purchasers” of automotive wire
harnesses and related products has brought a new angle to the price-fixing conspiracy. The Martinez Manufacturing suit names all of the
above mentioned companies and more, claiming that their anti-competitive practices caused Martinez Manufacturing and similar companies to
pay artificially inflated prices when purchasing automotive wire harness and related products which were then resold to automotive OEMs.
Martinez Manufacturing Inc., later MGI Manufacturing, was acquired by Thermtrol MGI Global, a subsidiary of Thermtrol Corp., in 2007.
Writing about the prospects for 2011 at this time last year, I cited the risks to the recovery posed by growing government debts.
2012 Although there were no actual defaults on government debt this year, we did weather significant events related to such an event;
namely Standard & Poor’s downgrade of the US Treasury’s long-term debt and spiking lending rates for Greece, Portugal and Ireland. The
downgrading of US debt carried more bark than bite and ultimately proved rather benign for the actual health of the US economy. Perhaps the
significance of the downgrade diminished only because of the more tangible struggles in Europe to keep the Euro alive. In the US at least, the
ongoing disruptions and uncertainty created by governments’ debt problems provided a near worst case scenario for businesses and consumers, yet the economy continues to grow modestly. The Euro Area countries, however, seem to be slipping into recession amid the turmoil.
120
The Conference Board Leading
Economic Index
115
Index Value (2004 = 100)
The graph to the right shows the trend of The Conference Board’s Leading
Economic Index for both the US and the Euro Area back through 2004. The Index is
a composite of various leading economic indicators like the money supply, the yield
curve, new orders for capital goods and stock prices, and its decline is usually
followed by recession in the respective region. The US Leading Index continues to
grow and even accelerate in the second half of this year suggesting that there is no
pending recession in the US. The Euro Area Leading Index on the other hand,
reached an abrupt turning point in February of this year and has since been in
decline. Although the downward decline could still prove short lived, the direction
and pace of the Index suggests that overall economic activity in the seventeen EU
member states that have adopted the common currency will decline at some point in
the coming year – if it hasn’t already.
US
Euro Area
110
105
100
95
90
2004
2005
2006
2007
2008
2009
2010
2011
Strengthening the view that the US is not headed into recession is the state of the
US Treasury yield curve, itself a component of the Conference Board’s Leading Economic Index. The yield curve measures the spread
between the interest rates paid for short-term bills and longer-term notes. Under conditions of normal economic growth, long-term notes pay
higher interest than short-term loans to the government as investors expect some inflation during periods of growth and demand a premium
for tying up their money for a long time. In the graph on the opposite page, these normal conditions are represented by the points where the
percentage spread is greater than zero. When the chance of recession grows, future deflation and interest rate decreases become more
probable, both of which cause bond traders to bid down the value of long-term Treasury notes. When the interest paid on long-term notes falls
below the rate on shorter-term bills, the yield curve is said to have turned negative and suggests that a recession will soon follow. As shown in
the graph, where historical periods of recession are noted by grey shading, a negative yield curve preceded every recession for the last 45
years. There is some reason to believe that the predictive power of the yield curve is diluted by the Federal Reserve’s aggressive and
Volume 5 Number 12 │ December 2011
www.IEWC.com
BY THE
NUMBERS
(US)
Industrial
Production
November
Unemployment
+0.7%
8.6%
(Sep to Oct change)
Retail Sales
(Sep to Oct change)
(Sep to Oct change)
+0.6%
expansionary monetary policy which is explicitly designed to affect bond yields, but
with a current spread of nearly +2%, the signal of continued economic expansion is
pretty clear. To have a US recession follow early next year would be a true
anomaly.
Mfg.’s New Orders
for Durable Goods
-0.5%
October
CPI Inflation
(over prev. 12 months)
+3.5%
US Treasury Yield Curve
4%
Average Monthly 10yr - 1yr Spread
3%
2%
1%
The future trajectory of copper prices in 2012 is as unpredictable as
Copper the features of Apple’s next iPhone. The price of the metal depends –
0%
like all other prices – on supply and demand. As neither the supply nor demand for -1%
copper tend to change very quickly in one day, the gyrations in price seen on the
-2%
Recession
futures market are largely affected by the expectations for future supply and
-3%
10-1 yr Treasury Spread
demand. The medium-term supply outlook is more stable still, so it is mostly the
-4%
'69 '72 '75 '78 '81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11
potential demand of the world economy that makes the market move. A better
than expected jobs report in the US will usually push prices up as traders know
that more jobs lead to more income which leads to more purchases of products that contain copper. In the same way, a report revealing
growing inflation problems in China may push down copper prices with the concern that policy makers in China will need to raise interest
rates, slow the economy and subsequently reduce the country’s purchases of copper products and building materials. With so many variables
affecting the price of copper, there is no way to accurately predict its next move. Predicting what will happen tomorrow is exactly what
thousands of traders attempt to do every day on the futures market, and it is their collective wisdom that sets the price of copper today. To
predict a future copper price at anything other than today’s price then, assumes that you know something that all those traders don’t. For me
at least, that would be a stretch.
$/lb
Copper Indices
Displayed in the graph to the right is the price trend for COMEX copper as well as
$5.00
the Omega-Camden index, which adjusts only twice a month. The Camden index is
popular in the US and Canada as an alternative copper index to COMEX given that
$4.50
it is published by the International Wire Group (IWG) of Camden, New York –
$4.00
historically the dominant supplier of stranded copper in North America. As is visible
in the graph, Camden is priced above COMEX to cover Camden’s processing costs
$3.50
and profit from turning the raw cathode, as sold on the COMEX exchange, into
copper rod. With many wire and cable pricing contracts tied directly to one of these
$3.00
Omega-Camden
indices, it is easy to feel that one would get a better deal by choosing a contract
COMEX
based on COMEX since the dollar value of the index is almost always lower. In
$2.50
reality, however, there is no price advantage to using one copper index over the
Jan '11 Mar '11 May '11 Jul '11 Sep '11 Nov '11
other. Wire and cable is sold to end users at a price that appropriately covers the
cost and profit associated with manufacturing and distributing the product. If two suppliers quote product, one with a COMEX copper adder
and another with a Camden copper adder, all other things equal, the supplier quoting COMEX will sell at a higher base price. The COMEX
supplier must use a higher base to ensure that their average selling price allows them to stay profitable and competitive with the Camden
supplier. Do the math on any proposed agreement and you should find that no supplier will be “cheaper” based simply on the copper index
they use if you average prices over just a few months. The only real consideration in setting up these sorts of contracts is what time period will
be used to determine the “current” copper price. If product pricing is adjusted
daily to the current price of COMEX, procurement costs will be much more
volatile than if one used the Camden price, which IWG adjust only on the 1st
Sincerely,
and 16th of each month, or some previous months’ average of daily COMEX
prices. These copper-adjusted pricing contracts can add a useful bit of price
stability to regular purchases of wire and cable product, but they also add
complexity that may present a challenge to existing computer systems and
Brian Hirt
processes. Be sure to consider these issues before pursuing such a
M.A. Economics
contract, as it may be more trouble than it’s worth.
IEWC
[email protected]
Happy Holidays to you and yours!
262-957-1118
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