In a typical metal part fabrication transaction, material costs are predictable and built into the quoted price for the entire job. The structure is rather different purchasing custom electrical contacts and other specialty components made from precious metal alloys. Due to the volatility of noble metal prices, purchasing requires consideration of raw material acquisition and financing in addition to the fabrication cost.

Precious metals such as platinum, palladium, gold, and their alloys, have hefty price tags that will fluctuate daily based on commodity markets. This becomes a significant factor since the metal content typically represents 60-80% or more of the total component cost. Financing and management of these materials becomes a more critical decision for buyers.

Flexibility is a key consideration, since fabrication houses need to be able to accommodate various purchasing conditions such as order size, cash flow requirements, risk tolerance, and precious metals market expertise.

There are four typical arrangements that suppliers will offer customers to help them meet their purchasing requirements. They range from full-service solutions which prioritize both simplicity and convenience, to more sophisticated options which provide maximum cost optimization along with added flexibility. Each of these four approaches strikes its own balance between control, cost, and complexity.

Four Approaches to Precious Metals Management

1. Full-Service Manufacturing

With this turn-key approach, the manufacturer handles the entire process from material procurement to finished part delivery. Customers start by placing a purchase order, with the agreed fabrication cost, but variable material cost. The price of the material is then locked in when the job ships out.

This approach is by far the most popular due to its convenience, but is typically the most expensive. It’s ideal for buyers that are new to precious metals manufacturing, have smaller volumes, or would rather have simplicity over cost optimization. This method requires no precious metals expertise from the customer.

2. Hybrid Pool Account

Here, the customer establishes a pool account, where they deposit enough precious metal to cover the expected shipped weight of their order. They only receive an invoice for fabrication services, while the metal is pulled from their pre-funded account. Pool accounts may be funded in three different ways:

• Customer buys the material and deposits it to supplier’s account.
• Customer already has it, they can certify it, and then physically delivers it.
• Customer will wire transfer from their bank to supplier’s bank.

This approach is great for companies with moderate precious metals usage who want to lock in pricing at the time of order. This approach transfers price risk from the supplier to the customer, but provides cost predictability.It requiresadvance planning and cash flow management, as metal must be purchased and deposited before manufacturing begins.

3. Full Pool Account

In this scenario, buyers maintain pool accounts funded well beyond their immediate order requirements. It’s a flexible option since it creates a working inventory that may be used for current and future projects, at a fixed metal rate. Fabrication costs are also lowered, since risk on the manufacturer’s side is reduced.

A full pool account works well for high-volume customers with both strong financial capabilities in addition to precious metals expertise. These buyers will typically have long-standing relationships with metal dealers and also understand complex commodity market dynamics. This method is not ideal for all customers, since it requires large initial investments and ongoing management of the precious metal inventory. Customers must also account for add-ons such as storage, security, and insurance costs.

4. Pure Metal Lock (Futures Contract)

This option allows customers to lock metal pricing at the time of order without funding a pool account. In this arrangement, the manufacturer enters a futures contract to hedge the metal risk, and passes the associated fees to the customer.

This approach is rarely used due to the additional complexity and cost. Though it may be appropriate for buyers who want price certainty, but cannot or prefer not to establish pool accounts.

Conclusion

Selecting the right purchasing strategy relies on several factors. These include order frequency and volume, financial capabilities/cash flow preferences, risk tolerance, and expertise. Most suppliers can help decide which way to go by providing cost analyses that compare the different approaches.

Precious metal component manufacturing isn’t simply about fabrication capabilities. It’s about creating a materials management program that best supports your business objectives while managing the complexities of working with very valuable materials.