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The Wild Ride of
Fluctuating Metal Prices
By Lynda Nolen, Bishop &
Associates Inc.
How do you provide your customers with
the most technologically advanced connectors in a reasonable time, and
at a fair and competitive price? This question has plagued connector
manufacturers for decades. Investments in research and design can assure
you are offering the most technologically advanced products, and
certainly, investing in top-of-the-line manufacturing equipment can
guarantee the parts you produce meet customer specifications and are
produced efficiently. You can even make your website more user-friendly
and upgrade your customer service. But, what about the things you can’t
control? The cost of raw materials is one uncontrollable factor. This
question has stumped CEOs, CFOs, managers, and buyers for decades, and
if you take a close look at the fluctuating prices of raw materials, in
particular precious and base metals, you’ll quickly see that attempting
to answer this question can only leave one wondering if a crystal ball
could be more accurate.
Metals, both precious and base, are used extensively in the
manufacturing of connector products. Gold, silver, palladium, copper,
nickel, and tin, as well as other metals, are characterized by unique
properties that make them invaluable in transferring electrical signal
and power, as well as impacting product durability, size, and weight. In
addition to the electronics industry, precious and base metals also
offer a variety of properties that make them invaluable to other
industries. It is this broad variety of end-use markets, and the demand
generated by these markets, that affect metals’ availability and price.
Metal Basics
Gold,
which has been used extensively in the manufacturing of all types of
electronic equipment and components for decades, is the most
malleability of all metals. This means it can literally be beaten into
extremely thin, transparent sheets. Gold also has the greatest ductility
of all metals. One ounce of gold can be drawn into a thin wire
approximately 50 miles (80 kilometers) long. As one of the densest
metals, gold weighs roughly 19 times as much as an equal volume of
water. Similar to silver and copper, gold also is an excellent carrier
of electric current and conducts heat well, and these are just gold’s
physical properties. If you then add gold’s chemical properties, such as
the fact it does not dissolve or corrode when it comes in contact with
simple acids and bases, nor does it rust when it comes in contact with
oxygen or water, it is not surprising that gold is used extensively in
the production of connector contacts.
Silver, which conducts heat and electric current better than any other
metal—even gold, is second to gold in ductility and malleability. Also,
like gold, silver has been used in the manufacturing of electronic
components for decades.
A non-noble metal, silver does react with oxygen, creating a surface
film called tarnish, which does limit its use in certain applications.
This is contrasted by its sensitivity to and high reflectance of light,
sought after in other applications.
Another metal that exhibits good malleability and ductility, and
therefore is often used in the manufacturing of electronic connectors,
is copper. Ranked just below silver, copper is also recognized for its
ability to conduct electric currents. Copper is also fairly resistant to
corrosion, creating its own protective layer called patina. Copper is
generally mixed with other metals, forming an alloy to improve its
strength and durability. Copper mixed with zinc forms brass; mixed with
tin, aluminum, phosphor, or nickel, it forms various bronzes; and mixed
with beryllium, it forms beryllium copper.
Other metals used in the manufacturing of connectors, in particular,
contacts,
include palladium, an extremely rare metal classified as a precious
metal, but valued for its durability; tin, valued for its low melting
point, and thus, its ability to be used as a soldering compound to join
other metals; and nickel, generally used as an undercoating and valued
for its hardness and wear-resistance.
Factors Affecting Supply and Demand
Over the last decade, numerous factors
have affected the roller coaster ride experienced by the precious and
base metal industries. Although slowing down at times for many to change
seats, switching to alternate materials and methods, it is not expected
that the ride is going to level out or end anytime soon. To understand
why this ride appears not to be stopping in the near future, it is best
to examine some of the reasons behind its origins.
Gold
 Increased
investment demand—In
a volatile economy in which other forms of currency are continually
fluctuating, gold is thought of as a safe haven for investors,
increasing the demand for investment gold. In 2007, investors purchased
almost 44 million ounces in gold; in 2008, the total was 43.3 million
ounces. Converting currency assets to gold also allows investors to make
their investments more portable.
Increased consumer demand—As
disposable income rose in developing countries, so did the desire for
material goods. From 2000 until early 2008, countries like China saw a
high demand for items like cell phones, iPods, and laptops. All of these
products, which rely heavily on gold to assure high-reliability,
high-technical performance, and protection from environmental
conditions, created a demand level for gold not previously experienced
in this end-use equipment sector. In addition to its rise in developing
countries, demand also increased in developed countries, as
manufacturers competed for market share by offering improved services
and additional options.
Reduction in overall supply—Based
on recent sales levels, it appears that central banks have sold all the
gold they presently intend to, decreasing total available supply.
Silver
Shift from seller to buyer—From
1990 through 2005, a shift in investors net position in the silver
market was observed, as many switched from being net sellers of silver,
to being net buyers of silver in 2006 and 2007.
A multitude of new applications—In
addition to the number of traditional uses for silver, a number of new
applications have evolved in the last five years. According to the
Silver Institute and the 2008 Silver Book, sponsored by Fortis/VM Group,
new applications involving the use of silver could drastically affect
supply and demand, reflective in the continual change in the value of
silver over the next five to 10 years. These applications include:
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Radio Frequency
Identification (RFID) Devices—“Passive RFID tags each contain an
estimated 10.9 milligrams of silver.” In addition to RFID tags used
by larger retail conglomerates, RFID tags will eventually find their
way into libraries, on textbooks and passports, and automobiles for
identification purposes. It is estimated that demand for RFID will
range between 500 and 600 billion by 2015.
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Medical and Health
Applications—In the last five years, there has been a tremendous
resurgence of silver use in medical and health applications. Part of
this has been in response to updated research that indicates silver
has the ability and power to prevent bacteria growth. This is
particularly important as it relates to MRSA, a strain of staph that
has been found to be resistant to present day antibiotics.
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Water Processing—Presently
used by NASA to purify water for the space shuttle, as well as by
numerous airlines to control waterborne diseases, colloidal silver
water filters offer an additional method to provide developing
countries with fresh water.
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Wood Preservation—With
arsenic-treated wood no longer acceptable in many countries, silver
(as well as copper) is being investigated as an alternative. This in
itself could lead to a significant new demand for silver in the
coming years.
 Greater
emphasis on alternative energy solutions—With
over 90 percent of solar conversion cells being sold containing silver,
and a 51 percent increase in the global production of solar
(photovoltaic) cells in 2007, the amount of silver required to support
this growing industry has also increased. It is anticipated that with
additional government incentives, as well as additional laws being
implemented to assist in the cost of alternative energy programs, the
demand for solar cells will continue to grow, and in turn, the demand
for silver will grow.
Switch to digital photography—Society’s
continued shift to digital photography has also affected silver supply
and demand. In 2007, this created a reduction in silver demand by over
10 percent.
Copper
 Increased
demand for factories and housing—The
building boom of the early 2000s was one of the primary reasons copper
has jumped significantly over the last five years, but it will see an
equally dramatic drop as residential and commercial building starts
slump as the housing market continues to stagnate. This was already
evident as the price of copper fell 50 percent from July to December
2008. Approximately 439 pounds of copper are used in the building of an
average home, including approximately 195 pounds of building wire.
Development of alternatives to copper in common applications—During
the housing boom of the early 2000s, and in an effort to reduce home
building’s dependence on copper, previously underutilized alternatives
were given new life. Now, even if building increases, investments in
alternative solutions to copper, such as polymer solutions, have already
been implemented, and many who have spent time and money in training and
equipment, may not feel comfortable switching back to copper.
Like many of the other metals discussed in this article, copper has
experienced tremendous ups and downs. In 1999, copper was priced at
$0.60 per pound. By May of 2006, it had jumped to $3.75 per pound,
exhibiting a CAGR of almost 30 percent, much lower than the 4.4 percent
CAGR of the electronic connector industry during the same period. Today
copper futures for July sit at $2.05, a climb of 11 percent since last
month. But, with more than 50 pounds of copper in a typical U.S.-built
automobile, and both Chrysler and GM anticipating major factory
shutdowns this year, this four-month gain in copper might just be
another bump on the ride.
 Nickel
Demand for
stainless steel—One
of the major factors for the dramatic increase in nickel prices was the
demand for stainless steel, which accounted for approximately 65 percent
of the total demand for nickel from 2002 through 2006. Although demand
was worldwide, developing countries, like China, that were experiencing
exponential growth, greatly increased previous demand. In a five-year
span, from 2002 to 2007, China doubled the number of steel factories, to
more than 7,000.
Change in composition of stainless steel—As
it became evident that nickel producers could not meet the world’s
demand, a switch from high-nickel content to low-nickel content
stainless steel, as well as duplex or ferritic stainless steel, was
implemented. It is uncertain if lower nickel prices will cause a
reversal in this trend.
Palladium
Limited number of suppliers—With
an extremely short list of suppliers, and two suppliers accounting for
over 80 percent of supply, fears of a palladium shortage have caused
users in the past to stockpile quantities. Unfortunately, many who did
this in 2000 had to write-off huge losses because of a drastic decrease
in cost. As the economy turns around, hopefully, history will not repeat
itself, decreasing supply and driving up the price.
Increased demand due to new applications—Like
silver, the number of applications and markets using palladium are
expected to increase over the next five years. In addition to a major
push to have palladium accepted as a viable alternative to platinum in
jewelry, palladium is currently being explored as a major player in the
development of fuel cells.
Tin
RoHS Directive—To
alleviate many of the environmental hazards associated with exposure to
lead, the RoHS directive, which was effective July 1, 2006, banned the
use of lead in many electronic applications. This banning caused most
manufacturers to switch from lead to tin in applications requiring
soldering, increasing the demand for tin.
For both precious and base metals, it is also important to understand
that the mining process is very capital-intense. On top of that, when
capital is allocated, production generally lags behind demand, creating
a new set of challenges. As in other industries, when prices fall below
the cost of production, production often ceases, once again depleting
supply, and creating increased demand. For many countries, when
production decreases, so does employment, creating a ripple effect
throughout the economy. This decrease in demand has also had a major
impact on the recycling industry, where products previously valued for
their metal content now cost more to recycle then the metal in them is
worth.
So, just how are connector manufacturers handling the roller coaster
ride created by the ups and downs of the precious and base metal
markets? The answer is, carefully. Some manufacturers have returned to
the gold-adder days of the late 1970s, where in a period of less than
five years (August 1976 to January 1980), the price of gold increased
700 percent. But unlike in previous periods where adders were applied
across the board to all products and fluctuated daily, the approach to
adders, and how they are applied, is entirely different today. Much of
this is due to the manufacturers’ ability to monitor all stages of
production, from order placement to order delivery. New and more
sophisticated MRP systems provide planners, buyers, and production
personnel with an enhanced overview of the entire manufacturing process,
assuring no part of the process slips through the cracks.
 In
exchange for a precious metal adder, some manufacturers are using a type
of escalation clause that is specified and agreed upon in contract
negotiations. These escalation clauses, as explained by Pam Bauch,
assistant commercial product manager for Cinch Connectors, are generally
worded to allow review of certain metal costs on a monthly or quarterly
basis. When it is quarterly, it is normally reflective of the previous
three-month average. Bauch said, “This is generally only seen in
products with high precious or base metal costs. What is so good about
doing it this way is that both the customer and Cinch are compensated.
If the price of a particular metal specified in the contract decreases,
these cost savings are passed on to the customer.”
For most distributors, suppliers have addressed price adjustments
necessitated by an increase in raw materials.
This adjustment is not based on an escalation clause or an adder that is determined
at the time of shipment and is applied as a separate line item to each
part number, but as a periodic price increase. According to Jeff Shafer,
vice president, interconnect, passive, and electromechanical (IP&E)
products for Digi-Key, “The position that the supplier has taken when
raw materials have increased has been to increase their prices via a
separate adder (periodic price increase). When there were gold adders
back in the 1980s, the supplier added separate adder line items to the
invoice. This caused major problems because system software could not
amortize the adder into the price of the part.”
 In
addition to implementing price adders or periodic price increases, as
well as escalation clauses, many manufacturers have implemented steps
towards reducing the amount of precious metals required in the
manufacturing of their products. For example, according to
Xavier
Cassignol, corporate V.P. global purchasing, FCI, and Gilles Ruckstuhl,
corporate V.P. finance, FCI, “The design of the products and the
adaptation of manufacturing processes are partly driven by the evolution
of the costs of such materials.” Based on this, FCI is continually
conducting significant research in this field. “For example, usage of
gold has been and is still significantly reduced to the benefit of
palladium or some other alloys. Similarly, FCI has always studied
optimization of connection capabilities, while reducing gold plating
thickness, or even making targeted gold plating (contrary to overall
plating, as was done in the past). This is what FCI has patented under
their NXT plating (nickel-phosphorous) system. By using significant
technical know-how and process knowledge that has been developed over a
period of several years, the capabilities were created to utilize this
technology in high-speed, reel-to-reel applications for interconnect
products.”
Besides developing new plating technologies, some manufacturers are
working to expand existing plating practices. For instance, in
applications that require durability beyond 500 mating cycles, 0.00005
gold-over-palladium nickel was approved for use in the 1980s and ‘90s on
composite Mil-DTL-38999 Series III and on Mil-DTL-29600, yet has not
been widely used. In fact, in February of 1990, Mil-C-39029 (AS39029)
released slash 106 and 107, specifically geared toward applications
requiring extended mating cycles. With this in mind, it has been
confirmed that at least one major manufacturer of military contacts is
in the process of requesting approval from the appropriate governmental
agencies to have gold-over-palladium nickel added as an equal and
alternative to gold or localized gold on many other military-approved
circular contacts.
Now, many may wonder, why use palladium? Why not just stick with
localized gold, particularly in applications where durability beyond 500
mating cycles is not required? Those in the business of manufacturing
localized plated contacts know the biggest drawback is the cost of
capital equipment. Equipment necessary to plate contacts in this manner
is generally dedicated to that unique process, and is extremely
expensive. Unless the volume of product is sufficient to warrant the
cost of the equipment, you end up with a substantial amount of capital
investment sitting idle. Secondly, because palladium has a lower density
than gold, less of the metal is required for a coating of similar
thickness. And it’s not like palladium is new to the electronic
component industry; palladium has been used for years in multi-layer
ceramic chip capacitors and in conductive tracks on hybrid integrated
circuits. Of course, the primary end-use equipment market for palladium
is the automotive industry, where it is used in the production of
catalytic converters. But even this makes it more attractive than gold,
due to the fact that unlike gold, which experiences price volatility
because of its investment demand, palladium’s extensive use in the
industrial market allows it to be tracked more as a general commodity.
As mentioned earlier by Jeff Shafer with Digi-Key, implementing
selective price increases is another way many of the connector
manufacturers have managed to survive the roller coaster effect of
precious and base metals prices. Almost every manufacturer we spoke with
indicated that although price increases have not occurred across all
product lines, products with heavy metal burdens have experienced
nominal price increases in 2008 or early 2009. Most also indicated that
although prices for some metals have dropped significantly, they do not
anticipate these declines in pricing to compensate for the increase in
other metals, primarily gold and copper. Either way, most long-term
contracts entered into today typically give the customer, whether it be
the manufacturer or the end-user, the right “to test the market.” If
contractual pricing appears out of line due to decreased metal prices,
pricing can generally be renegotiated.
In addition to understanding and monitoring their manufacturing
processes better, working on a customer-by-customer order basis,
instigating selective price increases, developing new plating
technologies, or expanding on technologies already developed, connector
manufacturers are also managing, as explained by FCI, to “keeps stock
(of metal) as low as possible.” FCI also commented that they have
implemented a “hedging policy, adapted to each of the markets served,
with the main objective to preserve FCI divisions’ gross margin.”
Now that we have a somewhat better understanding of how the ups and
downs of the metal industry are being handled by connector
manufacturers, does it make it any easier for us to open our eyes on
this seemingly endless roller coaster ride? Probably not, but what is
most important to remember is that with all metals, precious or base,
although the electrical and electronics end-use markets may represent a
significant portion of market demand, neither of these segments is tied
directly to the rise or fall in pricing of any particular metal. It is,
and will always be, the total demand created by all of the end-use
markets that will control the price we will pay for these valuable
commodities.
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Lynda Nolen
Product Specialist, Bishop & Associates Inc.
Lynda Nolen has been in the interconnect
industry for
over 30 years.
She has worked in sales, sales management, marketing, and
product management for such companies as TRW Electronics
Components Group, Sunbelt Components, Cinch Connectors, Arrow
Electronics, PEI Genesis, and Delphi Interconnect. Nolen has
extensive experience in competitive cross-referencing, drawing,
web and catalog review, new product introduction programs,
harness and connector assembly programs, account management, and
customer service programs. Lynda received her Bachelor of Arts
degree from Roger Williams University in Rhode Island in 1979,
and has completed various electrical engineering courses.
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