Soar - Precision Plating Company

01/18/2008

INDUSTRIAL CONSUMERS FEEL PINCH AS GOLD PRICES SOAR - PRECISION PLATING COMPANY
By Melanie Burton

Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--For years, industrial demand for gold used in electronics has been relatively price inelastic, but with gold now notching up gains of 33% over the last year, there are signs consumers are feeling the pinch.

Industrial consumption accounts for around 450 tons or some 12% of total gold demand. Of this, around 80% is used by applications like connectors in brakes and airbags in the auto industry. Analysts and consumers say that soaring gold prices have increased pressure on manufacturer's credit lines while they look for ways to minimize use of the metal or in some cases consider cheaper alternatives.

Rising gold prices have been a "hindrance" as other costs also spiral higher, says William Southall, Managing Director of UK-based Frost Electroplating. "Our prices go up in line with the price of gold...(and) we recover that from our customers. But our debtors and stock costs go up which means the amount of cash tied up also goes up."

Frost Electroplating is one of the largest independent electroplating companies in the U.K, working in electronics, automotive and electrical applications.

The price of gold accounts for between 60%-80% of the end price of products Frost makes.

Southall said Frost has enough cash to cover costs but pressure on companies that overtrade, with cash trapped by large debtors and in high volumes of stock, could force some out of business. In an environment where credit lines may be stretched to the maximum, there's always the risk one domino could fall.

"Generally speaking, to get the best prices we have to pay cash. But your customers will never pay cash...so even if they're on monthly terms you also carry the risk that they'll go out of business," he said.

Upward price pressure is also pushing some managers to consider cheaper alternatives to gold like palladium.

"We are seeing some shift towards a palladium-based alloy. Even through this isn't across the board, there is some movement; that's directly related to the price differential between those two metals," said Philip Klapwijk, Executive Chairman of metals consultancy GFMS.

This week spot gold prices are more than double palladium, at close to $900/oz against $375/oz for palladium this week.

The trend to replace gold with palladium tends to be a trend more based in the U.S., Klapwijk said.

Chicago-based Precision Plating Company, which electroplates for the aerospace, military, automotive telecoms and medical industries, said rising prices over the last few years has led to increasing substitution of palladium for gold in some parts of the electroplating spectrum.

"Some people do it and it's a very good shield for prices," said president Gary Belmonti. Precision Plating uses palladium rather than gold in some applications as its customers look to trim costs, Belmonti said.

However, while palladium is less dense than gold, offering an even better price performance per ounce of metal, the metal's performance characteristics differ.

"Although palladium is harder, its thermal conductivity and corrosion resistance are lower (than gold) so if you want something to be resistant to corrosion, conduct electricity and also conduct heat away, gold is better from that point of view," said Richard Holiday, Head of Industrial Applications at the World Gold Council.

Such change is unlikely to occur overnight, but once the process is in motion as it has been for industrial metals copper and nickel in recent years, it can seriously dent demand. When copper was above $8000/ton in the first half of last year, worst-case scenarios were that substitution could drain up to 5-10% of demand by the end of the decade.

By 2007, copper had lost 2% of demand to alternatives like plastic tubing in the plumbing sector, as prices soared from under $2000/ton in 2002 when the commodities boom first kicked off.

Once machines are retooled, products redesigned and specifications reset, that's an element of demand unlikely to come back, analysts note.

But Belmonti said while some customers have switched to palladium, others are holding back, "gun shy" for now because of a spike in palladium prices from $250-$1100 over the course of 2001.

But there are still more ways high gold prices are negatively hitting industrial consumers of gold:

Belmonti said wasted metal due to reworks or product failure "is much more significant to us" than before. "Say we're making a product for somebody and it's one ounce of gold. In a rework, we lose maybe 20%, so it's affecting us there. Now it's a $1000 impact for that ounce," he said. -By Melanie Burton, Dow Jones Newswires; +44 (0)20 7842 9412; melanie.burton@dowjones.com

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(END) Dow Jones Newswires

January 17, 2008 09:42 ET (14:42 GMT)

Copyright (c) 2008 Dow Jones & Company, Inc.

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