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Wire-rod pass-through
What it is
Steel wire rod is the primary input for fasteners, typically the largest single cost. Contracts with OEMs usually carry a price-variation clause that passes steel movements through with a lag of a quarter or so
The lag is the whole issue - the supplier absorbs the gap between input cost changing and selling price adjusting
Impact on industries
- Pass-through means the business is a conversion margin rather than a bet on steel prices, so earnings should be stable through a commodity cycle
- The lag creates a real timing loss when steel rises quickly, and a windfall when it falls - so reported margins swing on input direction despite the clause
- After-market and non-OEM sales carry no such clause, so that portion of the book absorbs steel volatility in full
- Special-grade alloy wire rod for high-tensile work has fewer suppliers and less transparent pricing than commodity rod, so pass-through is harder to negotiate at the top of the range