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Member

Join Date: Nov 2008
Location: India, Hyderabad
Posts: 9

Transformer Pricing

12/11/2008 7:51 AM

hi...

can anyone tell me how price variation clause (PVC) is considered for transformer pricing

thank you,

..

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Guru

Join Date: Apr 2007
Posts: 3531
Good Answers: 59
#1

Re: Transformer Pricing

12/12/2008 4:20 PM

The principle is that the price of the item at delivery can change in a similar way to the cost of the more expensive materials used in its construction. That protects the manufacturer against unanticipated cost increases. For a power transformer, the cost of copper is often chosen as a measure, but for very large contracts other materials may also be included. (Bulk purchases of RF transformers may alternatively use the price of rare earths)

A typical contract would give a nominal price plus a price that is a constant multiplier of the difference between the expected price and the official price (as publicly quoted). The contract should specify the date at which the price is determined - usually some time before the actual delivery. Be aware that there are are plenty of variations on the detail, such as thresholds that must be exceeded before price is changed, etc.

This can cause the price to change by a very significant amount in a volatile market; if this is significant for your business, it is quite common practice to use the futures market to offset the risk; as the purchaser of the transformer, you would typically buy the right to sell copper on the "trigger" date. (Alternatively, your end customer might agree to share the risk)

Once you have the general idea, you can read and re-read the proposed contract until the details make sense. It's also definitely worth looking how the official price of the specified commodity has varied.

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Member

Join Date: Nov 2008
Location: India, Hyderabad
Posts: 9
#2
In reply to #1

Re: Transformer Pricing

12/13/2008 12:38 AM

thank you physicist,

As per IEEMA PVC formula, copper price is to be considered 4months prior to despatch, some companies are followings this, but some are taking the price 1month prior to despatch. does the pricing depends on individual and not whole...

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Guru

Join Date: Apr 2007
Posts: 3531
Good Answers: 59
#3
In reply to #2

Re: Transformer Pricing

12/13/2008 10:59 AM

Oftentimes a one-fits-all formula won't. So the principles may be retained but the detail modified. The requirement depends on the length of the supply chain, and possibly also how the wire supplier handles the relationship between cost variation and PVC.

The problem to be overcome is that, on average, hedging involves additional costs, and one way of reducing the total value that needs to be hedged is to price as many as possible at the order date (some customers may even be powerful enough demand this for all their orders); that results in other contracts compensating by using a PVC with a date that is later than the materiel delivery date. A nightmare for the finance manager...

However the issue arises, the only questions you need to ask are whether the deal you are being offered is competitive and acceptable, and whether the variations are likely to be large enough that you need to either hedge them or find a way to pass them further down the chain (that last not not always being possible...)

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