Central Moloney
Transformers
TO: The Customers of Central Moloney, Inc.
FROM: Dennis VanVeckhoven, Eastern Region Sales Manager
Karen Barnett, Western Region Sales Manager
DATE: June 26, 2006
SUBJECT: Commodity Update



As you know, a significant upward trend in the cost of raw materials has emerged since 2004, and volatility in these markets is expected to continue.  Increased commodity prices have been influenced by a worldwide increase in demand as a result of rapid economic growth in China and India, as well as other countries.

We continue to see unprecedented commodity price increases.  Demand overseas for commodities like copper, aluminum, oil, zinc, nickel and silicon core steel continues to deplete supply for our domestic use.  Because of this strong overseas demand we are experiencing pricing levels that we have never seen before.  In 2003, copper traded around $.85/lb, 2004 around $1.50/lb and in 2005 copper reached $2.19/lb.  We thought this was unprecedented only now to see copper trading over $4.00/lb.  Aluminum has followed copper in this upward spiral.  Aluminum in 2003 traded around $.65/lb and is now trading in the $1.40/lb range.  Crude oil, over the past few years traded in the $40 to $50 per barrel range, but now has reached $70/barrel.

That said, our largest challenge is silicon core steel. There are only two (2) domestic core steel suppliers.  Prior to 2005, we could get core steel from the overseas markets, but that dried up with all the events happening in China, India and other countries.  With these countries expanding their electrical grids, the consumption of electrical steel overseas increased so much that all exports to the United States ceased.  Also, our two domestic mills started shipping more overseas because they could get twice the price.  Currently, there is a worldwide shortage of electrical steel.  Our suppliers, A.K. Steel and Allegheny Ludlum, have already approached us with price increases for 2007.

 We are receiving an 80% increase.  Both domestic suppliers are raising their price just below the foreign market pricing level. We are not alone in this problem.  All of our competition is seeing the same type increases.  Central Moloney's pledge to you is to do whatever we can to make sure we are not put in a non-competitive position when it comes to raw material costs. 

As commodities used for the manufacture of transformers and components continue to surge skyward this year and predicted to increase even greater in 2007, neither we nor the other manufacturers have any choice but to pass these commodity increases on to our customers in the form of higher prices.  Effective January 1, 2007, transformer prices are expected to increase 40% to 50%.  Because many of you will be preparing 2007 budgets soon, we wanted to provide this information to you now.

Central Moloney must continue to sharpen our focus and we are doing so.  For example, our engineering and production organization implemented utilization changes to make better use of costly materials.  And we will continue to seek ways to improve efficiency and implement cost reducing measures.

All of us at Central Moloney, Inc. thank you for your business and we look forward to strengthening our relationship with you and your company.
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