Material Costs

In March 2005 and May 2006 this column reported rising material costs. The chart below appeared in those articles and has been updated. The graph shows the indexed total switch market ASP versus raw materials used to produce switches and relays from Q1 2003 through Q1 2007. 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, increased sharply in 2006.  Copper prices spiked in the second and third quarters of last year then fell in the last period only to bounce back up this year. Silver prices held fairly steady in 2006 until the fourth quarter. Two forces - worldwide demand and speculation - keep pushing copper, silver, and gold prices upward. Crude oil prices peaked during the summer of last year then lost those gains in second half of the year.

Switch Manufactures are Increasing Prices

The blue line in the graph above shows the Switch Tracks price index for component switches in North America. In the second half of last year switch prices did move up. The table below shows percentage change between the fourth quarter of 2006 and the same quarter in 2005. All but DIP, keylock, and toggle switches saw double digit increases in pricing over a one-year period.

Even with switch prices on the rise, costs continue to increase much quicker than prices, continuing to put pressure on margins and many manufacturers have reduced overhead to be able to work on these margins. As cost reduction opportunities wane, manufacturing operations begin to near capacity, and material and energy costs continue to go higher, manufacturer’s profits become increasingly pressured to decline.

Relay Prices Decline in the Face of Higher Costs

The table below shows the change in relay pricing from the Q4 of 2005 to Q4 2006. Despite higher material costs electromechanical relays fell a few percent in price over last year. While solid state relays enjoyed the type price increases seen by switches.

The relay market place became more competitive as unit volume decreased throughout 2006 and is shown in the graph below. This is the likely reason for electromechanical relays price decline.

What about the Future?

So what does the future hold for commodity prices and the price of switches and relays? If I, or anyone else, could predict with certainty the information would probably not be shared. Since I am not certain, here are my thoughts.

Over the past few years when gasoline reached $3 a gallon there was a noticeable drop in demand. The shock of $3 gasoline is not what it used to be. The next horizon would be $4 a gallon and this is still $2 a gallon less than Europeans pay. Gasoline prices have become a function of refining capacity and not crude prices. The first chart in this article shows crude prices are well below last year’s peak that pushed gasoline above $3, and today we are at $3.  I wonder if refiners have incentive to spend money to increase supply or invest less and sell for a higher price.

Copper’s run up in price is driven by global demand primarily due to growth in China and India. As long the Chinese economy keeps growing at 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 switches has risen. It will be interesting to see if these increases can hold, particularly if the economy continues to grow at less than 2% and demand for switches fall. Also, for the same reason, can relay makers get more for their products? Perhaps not.

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, using it to buy back shares, pay increased dividends, or make acquisitions. They seem reluctant to invest to increase capacity or increase productivity for fear of a worsening economy. This combined with a poor housing and automotive market will keep demand for many manufactured goods down. Increasing the pressure to keep prices down.

Vemer-Siber Group Signs Deal to Acquire part of Signal Lux Group

At the beginning of April Italian switch manufacturer Vemer-Siber Group SpA acquired 100% of the shares of Signal Lux Italian companies, Signal Lux MDS S.r.l. and Signal Lux Italia S.p.A. The agreement includes an option for Vemer-Siber Group to acquire 100% of the shares of Signal Lux France S.a.S, a company that is currently subject to a governmental examination. The total sale for these Signal Lux companies was € 21 million in 2006. Vemer-Siber paid € 1 million to acquire Signal Lux.

Signal Lux was established in the early 1950s and has plants located in Italy, France and Tunisia. Signal Lux is the European leader in the signal lights segment and also has relevant market share in rocker and push-button switches.

The acquisition makes Vemer-Siber Group one of the major world-wide manufacturers of electrical components for household appliances, with a wide range of products and large geographical coverage. The Dreefs, Molveno, and now, Signal Lux are brands owned by the group.

Andrea Mattarelli, Chief Executive Officer of Vemer-Siber Group, stated, "I am glad to announce this important deal because it comes after three years of reorganization of the Group, and confirms the renovated vitality of the company. With Signal Lux we become one of the main world-wide players, strengthening our geographical coverage and further widening our product range.”

A result of this reorganization process Vemer-Siber is rebranding the division serving the worldwide appliance industry. This division now operates under the Everel name and includes the Molveno, Dreefs, Giem, and Signal Lux brand products.

Everel has its headquarters in Valeggio sul Mincio (Verona, Italy) and has production facilities and sales companies in Germany, USA, Brazil, Romania and Hong Kong.