Volume 41, Issue 9 - September 2006

Cost Awareness
How the Industry is Coping with the Rising Cost of Aluminum
by Peggy Georgi

U.S. consumers of aluminum billet and its end use products such as curtainwalls, storefronts, windows and skylight systems, have seen record prices over the past year. 

Prices spiked in May when the price per pound of aluminum billet jumped from $1.13 to $1.50 (33 percent). While prices have stabilized presently, the recent volatility has brought about much discussion from industry professionals and the impact on their bottom lines.

“The price of aluminum has risen some 15 percent between February and May of this year,” explains Fred Grunewald, former manager of research and development at Vistawall Architectural Products. Grunewald, says this increase is on top of a 27-percent increase that occurred between November 2005 and February 2006.

“The aluminum market has definitely been moving up, though it remains volatile,” adds David Brooks, deputy editor of American Metal Market, a daily newspaper for the metals industry that covers news and pricing information. “Prices on the London Metal Exchange (LME) have moved up around $600 per ton, or 27 cents per pound, over the last year and are currently (as of this writing) trading around $2,500 per ton ($1.13 per pound), which is very high by historical standards. In addition to the LME price, there is an additional cost; when buying aluminum billet in the United States consumers pay a premium over the LME to get actual physical delivery of the metal and then a further premium for converting the metal into billet. Right now, the total premium for billet over the LME is around 16 cents a pound, up from around 13 cents a year ago.” 

“Like other commodities, aluminum is impacted by both domestic and global supply and demand issues,” says Nick Adams, director of statistics and economics at the Aluminum Association. Adams points out that the rapidly increasing demand for aluminum in China has put pressure on available supply of raw materials. Markets for aluminum are also growing in North America, encouraging customers to seek materials from offshore. Imports currently amount to an estimated 10-percent of domestic consumption of aluminum extrusions with a significant amount coming from China.”

Keith Burlingame, senior vice president of sales and marketing at Indalex Aluminum Solutions, says this is only the second time since 1989 that he has seen this type of volatility.

“We have a different set of market forces today driving up the price,” he explains. “The GDP in China is in the 18- to-20 percent annual growth range and this time there is a huge demand for building and construction products. This strong demand is pulling a great deal of resources from around the world. In addition, the devastating effect of the hurricanes along the Gulf Coast of the United States continues to be felt across the nation and is also drawing upon domestic resources.”

“Aluminum prices were stabilized for a number of years before they began escalating in early 2005,” explains Bob Leyland, Kawneer’s vice president of sales. “During the four-year period between 2000 and 2004, we [Kawneer] were not able to deploy a single price increase. As a matter of fact, our customers experienced a decrease in price—that is, they were able to get more pounds for less money at the end of this period than at the beginning.” 

“It’s not just aluminum that has been on the rise, it’s all base metals,” says Steve Green, director of sales and marketing for Reed City, Mich.-based Tubelite. “It’s [aluminum] traded on the open market and impacted by a variety of market forces including supply and demand, casting capacity and commodities trading on the future of the metals market. No matter who you are or the size of your company, the base price for aluminum is the same and that involves the LME.” 

Max Perilstein, vice president of marketing for Tamarac, Fla.-based Arch Aluminum and Glass, agrees. “Metals are a volatile commodity right now,” he points out. “Like any other building trade product the price is impacted by supply. When demand is high and supply is low that will result in higher prices in the marketplace.”

“What I am hearing from some members is that the short-term business is up and profit margins are down,” says Rand Baldwin, president of the Aluminum Extruders Council. “The producers, companies such as Alcoa, Alcan and Hydro Aluminum, for example, all sell into the aluminum extrusion market. They have staff on board specifically to watch the market and trends and provide outlooks and forecasts, and commodity pricing. However, no one really knows for sure, especially since there are so many variables involved in the metals market. All any of these individuals can do is make the best recommendations for the most cost-effective purchase during any given time period. One thing we do know for sure about commodity pricing is that it relates to capacity verses long-term consumption, and for aluminum, consumption is expected to continue to increase.”

Facing the Challenges 
The rising cost of aluminum is driving suppliers to implement price increases to shore up shrinking margins. In addition to raw materials, labor, fuel, insurance, transportation and other operating costs are all on the rise as well. Some areas are subject more to world market forces than others but the fact remains that today, more than ever, it is essential for companies to continually look for new ways to conduct business and improve their operating efficiencies throughout their organizations.

“What is most relevant about this situation is how to deal with the dramatic variances that can’’t be passed on, like additional competitive pressures or if you are involved in a long-term contract. “This has definitely been a wake-up call with respect to supply shortages,” notes Baldwin.

To help offset the rising costs of raw materials suppliers are doing their best to stock up on aluminum alloy by purchasing large volumes when costs drop even slightly. Others are improving their manufacturing facilities and methods to lower the raw material loss rate during production and boost overall efficiency as cost control measures.

“Like everyone else, we’re getting hit with increases across the board—in some cases dramatically,” Burlingame points out. “Paint,” for example, “is a big product and the raw materials that go into the production of paint have gone up dramatically which, in turn, impacts the cost of the liquid paint we use on our metal. To address this, we invested $7 million in a powder paint line that we believe will be a better way to go for paint in the future. The point is, we’re not just passing along increases to customers. We’re also investing in new technologies to actively do our part to hold the line on costs.”

“Aluminum manufacturers also face price increases for health care, paint and other petroleum-based products that apply additional downward pressure on margins,” adds Leyland. 

“One way we work to help control costs is through Indalex International, which partners with companies from around the world that own aluminum mills,” says Burlingame. “For example, we can bring in aluminum from a mill in China at a much lower cost than domestic mills. That’s the upside. The downside is it can take 10 to 12 weeks to get products. In addition, there are more risks when importing aluminum from half way around the world, such as being caught up with customs, work stoppages at ports and an assortment of delivery issues. However, if a customer is willing to work with an international client with us, there can be some savings. It’s an option that works for some, but not all, because some companies simply can’t assume the risks that come with this source. To help make this international sourcing a viable option for more customers, we developed a program called Global Secure, in which we back up any overseas metal with products from domestic mills for a slightly higher premium. This dual-sourcing capability puts more assurance into offshore supply.”

He continues, “I believe most of us on this end are doing the best we can to get the best deals for our customers. We look at how we can buy differently, buy smarter and do our best to manage the ups and downs in pricing.

“Glazing contractors would be well-advised to do the same,” suggests Burlingame. “Get with your suppliers, ask questions, work together and implement the necessary changes on your end to reduce loss and maximize profit. It involves making some difficult decisions, but it’s no longer business as usual. Change is a constant in our industry and we are forced in many ways to stay on top of our game if we are to stay in it.”

Surviving the Swings
Aluminum, like most other building products, will be subject to pricing swings. Being in tune with trends, issues and changes that impact every aspect of business is critical; being able to address and respond to them is a key to ensuring a viable future. 

“It’s tough when prices start to increase, whether it’s aluminum, glass or any product,” says Rick Kasten of Lakeshore Glass & Metals, a glazing contractor in Holland, Mich. “To address the issue, we went to a very proactive mode, [being] in constant communication with our vendors and customers.” 

“We’re getting through, but only breaking even in terms of our profit and loss,” says Erica Chandler, owner of DEsigned Glass Inc., which specializes in custom shower doors, mirrors and residential glass in Burnsville, Minn. “Thank goodness for our cash flow—it has kept us afloat of late. We haven’t lost the cycle and continue to move forward. It’s tough, though, because we are paying more but don’t feel we can afford to mark up our products and services more to make a profit.” 

In an attempt to trim costs, Chandler has made design adjustments to eliminate some metal in products, tighten up in other areas around the shop and make smarter purchases without compromising on quality. “I don’t mind passing raw material increases along. It’s handling fairly the fluctuating energy surcharges that I struggle with,” she adds.

The increases have also impacted business at Campbell Glass & Mirror, a full-service commercial glass contractor serving the greater Dallas – Fort Worth area. 

“Life around here during the past four months has changed drastically,” says Bill Neely, who has been in the industry for more than 25 years and is the company’s new estimator. “Yet, it hasn’t deterred us too much and we are still snowed under with work.

“Prices in glass have always fluctuated and now aluminum is doing the same thing,” Neely continues. “My biggest concern is that the bids we are putting out now will catch up with us when it’s time to actually install. However, we are doing what we can to move along the process, remain competitive, purchase some material at a secured price and keep on top of things as best we can. All in all, it’s just like selling gold.”

Beyond Business as Usual
“When prices escalate, we have to make a decision on whether or not to pass costs along,” adds Chuck Glidden, manager of American Glass, a medium-sized glazing contractor in Waterville, Maine. “It seems we get hit with price escalations in materials, operating costs and energy surcharges at every turn. With each and every project, we must decide if and how much [of these costs] we are going to pass along. In a bidding situation, we need to account for every penny, while being as competitive as possible. We typically choose to include those costs in our bids. While it can mean the difference of getting or not getting the job, it also determines whether or not we make a profit. I don’t care how much the sale, if I am not making any profit it does me no good to do the job. I’m not willing to eat the increase in the aluminum just to get the job. The bottom line is if we don’t pass costs along we’ll be in big trouble in the long run.”

Taking innovative and new approaches as opposed to the traditional “business-as-usual” model may be the best solution in addressing escalating pricing issues. Making changes can often be difficult; not making change can close your doors.
“Kawneer is similar to other aluminum engineered-systems companies,” Leyland says. “That is, we buy raw material (i.e., aluminum billet) from a producer (such as Alcoa, which owns Kawneer) on the open market. While we may be owned by Alcoa we still only get 30-day pricing protection, which is standard in the industry. We don’t get any preferential treatment.”

Leyland continues, “Although our pricing protection from the producer is 30 days, we give our customers 60 days of guaranteed pricing. This has been our standard protocol during my more than three-decade tenure with Kawneer. We have never reduced this 60-day window because we understand that most projects, especially today, take more than 30 days just to get a contract awarded after the initial bid. We do, however, include language that allows us to review purchase orders we may receive based upon quotations that are older than 60 days. At that time, we may accept the purchase order as submitted or revise the quotation and send it to our customer asking for them to consider the revised price and reflect it accordingly in their purchase order.” 

“Following the trends and pricing for this commodity isn’t any different than following the trends and pricing for commodities that impact us at home such as gasoline, electricity and natural gas,” Burlingame explains. “For example, we were told through numerous sources early on there was going to be a significant increase in the cost of natural gas last spring. I think many of us can agree that the price of natural gas shot through the roof. It costs everyone more, from the producers to the suppliers, and for many of the same reasons it’s costing more to produce and extrude aluminum. Ultimately, these price increases were passed along to the end user and it’s it’s no different in this industry.”

He continues, “To deal with the increases [of natural gas], as consumers, we all had a number of choices, such as using less, investing in energy conservation practices around the home or office, locking into a price where you would have a certain amount to pay each month over the course of the year or do nothing. I am paying more for usage no matter what, but for me, personally, I liked the option to lock in at a fixed price for the year. With this option, there are no surprises from the peak usage months and I know what I am paying.” 

The same can be done with aluminum. “Distributors can lock in for a specific price for a specific time for a specific volume. It can be 100 percent of, or just a certain percentage of, the order. Of course, there are risks because we don’t always know where aluminum futures are going, but this is a viable option to help with rising costs and can provide a safety net, so to speak, especially in times of volatility.”

“At Arch, we have a director of purchasing, who spends a great deal of time, studying trends and forecasts in order to purchase materials, such as aluminum, for the best price at any given time,” explains Perilstein. “It’s actually a fine art to have just the right amount of product our customers need when they need it and at the best possible price. We try to weather these ups and downs and keep things as level as possible for our customers, but the reality is costs are going to rise and, in some cases, significantly—and outside of our control. Knowing this, suppliers and manufacturers have to be proactive and glaziers need to be smart with their bids and not bid so tight that they win the bid but lose money on the project.” 

“There has certainly been a squeeze on those businesses serving the end market,” adds Baldwin. “The reality is that many of these real costs, especially when working on a contract basis, will have to be passed through at some point.”

Recommendations
Still, viable options remain for addressing escalating prices.

“Today, contract glaziers and suppliers, like ourselves, simply have to work smarter, do things differently than they have in the past and pay attention to what is happening around them,” notes Leyland. “This includes identifying trends, paying attention to market forecasts and being flexible so that you can respond to changing market conditions. We have an abundance of resources at our fingertips through knowledgeable industry professionals, via the World Wide Web and industry publications that can help keep us in the know and help us better manage our respective businesses.”

Aluminum Resources
Keep current on global aluminum trends, news and information through using the following websites:
Aluminum Association www.aluminum.org
Aluminum Extruders Council www.aec.com
American Metal Market www.amm.com
International Aluminum Institute www.world-aluminum.org
London Metal Exchange www.lme.com
Platts www.platts.com

“There’s been about a three-year run-up in raw material pricing,” Baldwin says. “The challenge I see for business owners across the board today is learning how to better watch and manage trends in the marketplace that impact their operations and apply new and improved business practices to help offset rising costs related to material pricing, labor, insurance, etc.”

“First and foremost,” recommends Leyland, “is to ensure that language is included in your contract that addresses price, especially in a period of escalation. Having an escalation clause for any material that is rising at a rapid rate is always a good idea because it states in no uncertain terms how things are to be handled. Prior to including an escalation clause in your contract, consult with legal counsel for the necessary language and structure of the clause.

“Secondly,” emphasizes Leyland, “especially in today’s business environment, the glazing subcontractor must be crystal clear verbally and in writing every step of the way. This includes the time frame when the proposal needs to be reviewed and returned. Stay away from making open-ended commitments in terms of time or price. It’s important to pin down a price that works from a contractual standpoint.”

Leyland continues, “Third, keep those lines of communication open with your customers and your suppliers. When you ask your supplier for a proposal be as specific as possible in terms of the type of project, size of structure, when material needs to be shipped and for what period of time you want the proposal honored. It’s important to build in hard numbers based on market data and projected need. Then, it’s up to us (suppliers) to do our part. The closer and more accurate your lines of communication, the more likely you will end up with a desirable outcome all the way around.”

Leyland also says that being able to say “no” is important as well. “It’s not OK for a general contractor to expect you to honor a price of an expired contract, especially when he has sat on it [the contract] for six months. This goes back to being clear in the beginning with who will be responsible for price changes if the contract is not returned in a timely manner. We work with our customers the best we can but we also can’t afford to absorb price increases anymore than our customers can.”

“We tell our clients that the best way to protect themselves across the board is to put a clause in their proposals that addresses price changes and includes a deadline when prices will be subject to review and changes,” Green says. “We understand there is always a big squeeze by the general contractor but in the end you have to make a business decision and sometimes you just have to walk away from the job.” 

Looking Ahead
Market experts expect the demand for the material will continue to intensify. With the tight supply and inventories for the metal running at low levels, it is likely that the aluminum market may remain volatile and prone to price spikes until the stocks are replenished.

Fueling demand is the fact that the low weight, versatility and high mechanical properties of aluminum alloy make it a favorite material for an expanding line of applications. 

“As far as the future is concerned, anyone you ask will give you a different view of where it’s going,” says Green. “At the end of the day, a prudent company has to be prepared to adjust, make tough business decisions and protect itself.”

“Business is great and the economy is strong,” says Grunewald. “If the glazing subcontractor can communicate with suppliers and customers on issues that may impact the project early on, such as pricing, this can reduce and even eliminate a good portion of problems before a project begins.”

“Communicating and working together is imperative,” agrees Perilstein. “It’s really the best way to conduct business especially during the rough times.”

“Aluminum remains a plentiful commodity and still very affordable, it’s just at a higher price these days,” notes Baldwin.
“The bottom line is that real costs have to be passed along to the end user,” notes Grunewald. “Today, there’s just no room for these costs to be absorbed by processors, extruders, fabricators or glazing subcontractors.”

“We’re not in a crisis situation with aluminum by any means,” adds Perilstein. “Everyone just needs to adjust to the changing times and use their brains a little more. Aluminum and glass remain relatively inexpensive products and by pricing these items correctly at the onset, a lot of headaches can be avoided and profits can be realized in both the best of times and worst of times.”

“We are constantly presented with challenges in this industry,” says Burlingame. “It is how you react to those challenges that make you either a good company or a great one.”

USG
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