From the New York Times|
Material Shortage Affects Prices Of Optical Cables
By SETH SCHIESEL
The information highway is being paved with glass, but now the road crews are running low.
A worldwide shortage of optical fiber is slowing the construction of new telecommunications networks and forcing even big buyers to renegotiate supply agreements. Meanwhile, the shortfall is proving a bonanza for the small fraternity of fiber manufacturers as prices that fell for years have stabilized and in some cases even increased.
Behind it all has been an explosive growth in demand for fiber-optic cable - bundled strands of optical fiber that can each carry thousands of telephone conversations in a glass thread as thin as an eyelash.
Driven by an expanding market for Internet access and other high-speed communications links, annual installation of optical fiber around the world has doubled since 1993 to an estimated 16.25 million miles this year. That is a global fiber market of about $6 billion, with about one-third of the sales in North America, according to KMI Corp., a Newport, R.I., market research firm. And analysts and telecommunications executives agree that new forms of competition unleashed by the Telecommunications Act of 1996 insure that the appetite for fiber will not be sated soon.
``The rate at which the growth occurred has surprised just about everybody,'' said Clifford L. Hund, telecommunications marketing director for Corning, the world's largest optical fiber manufacturer. ``No one is getting all the fiber they want.''
Demand for optical fiber has run about 10 percent higher than production over the last year, leaving the supply about 1.25 million miles short of what buyers are seeking, said Robert P. Mohalley, a vice president at Lucent Technologies, the recently spun-off AT&T equipment unit that is the second-largest optical fiber maker.
Customers ``have to wait a little longer to get some projects done,'' Mohalley said. ``We've tried to share the pain.''
But as in most tight markets, the pain is not always shared equally. Helping propel the tremendous growth in U.S. demand for optical fiber is the construction of two new national telecommunications networks - a $2 billion venture by Qwest Communications, a subsidiary of Anschutz Corp., and a $600 million joint project by IXC Communications and Worldcom Inc. Both networks, set for completion by the end of 1998, are meant to compete with the national webs of the big three long-distance carriers - AT&T, MCI Communications and Sprint.
Also placing big new fiber orders are cable television companies seeking to upgrade their networks to carry more channels, advanced video and data services, and even telephone calls. Various other players, large and small, are also building metropolitan fiber networks to compete with the Baby Bells for local phone and data services. And as in most tight markets, the customers with the most to spend usually go to the front of the line.
``Earlier this year it was very tight; we were having problems getting enough fiber committed to do this build,'' said Tony Brodman, vice president for planning at Qwest Communications, which is using fiber-optic cable made by Lucent in its network.
Qwest's ambitious venture recently received new credibility when Frontier Corp., the nation's fifth-largest long-distance carrier, invested $500 million in the project and agreed to lease one-fourth of its capacity when completed. ``When the manufacturers realized we were serious,'' Brodman said of his fiber suppliers, ``clearly that helped.''
Time Warner, the No.2 cable television company and one of the world's leading buyers of optical fiber, will spend more than $30 million on fiber cable this year, said the company's chief technical officer, James A. Chiddix.
Under pressure from direct broadcast satellite networks like Hughes Electronics' 150-channel-plus DirecTV system, Time Warner and other cable operators are rushing to expand their network capacity.
``We're big enough that we can get supplied,'' Chiddix said. ``For a small customer, it's been rough.''
Just ask David D. Kinley, chairman of the Small Cable Business Association, which represents nearly 300 of the nation's smaller cable operators.
``You have very little leverage to get better prices or quantity discounts or quick delivery,'' Kinley said. As president of Sun Country Cable in Pleasanton, Calif. - which has about 10,000 subscribers, all in rural areas, and will soon buy about 30 miles of fiber-optic cable - Kinley is ``nervous - nervous about what price we're going to get and how soon.''
The average price of optical fiber fell from about 33 cents a meter in 1983 to 6 cents or 7 cents in 1994, according to Thomas A. Soja, a KMI analyst. But prices stabilized in 1994, and since last year Corning and Lucent have announced price increases for some optical fibers of up to 15 percent - their first price hikes ever, Soja said.
And when some smaller buyers do come to terms, deliveries might not arrive as soon as they would like. At Falcon Cable, which is based in Westwood, Calif., and serves 1.2 million subscribers in 27 states, ``deliveries are running anywhere from 16 weeks on out,'' said Raymond J. Tyndall, vice-president of engineering. ``In the past they've been as close as 4 to 6 weeks.''
Even some high-volume buyers are enduring delays. Late last year Pacific Bell, the local telephone arm of Pacific Telesis Group, renegotiated its pact with Pirelli Cable Corp., a unit of Pirelli of Italy, which in the United States assembles cable from other companies' glass fiber. Under the new terms Pirelli won more time to make its deliveries.
Between this year and next, Pacific Bell intends to spend $378 million installing fiber-optic cable and associated electronics. And though Pacific Bell executives deny any connection with the optical fiber shortage, the company announced last week that it would lease data capacity from a wireless company, in part to help meet heavy demand for new high-capacity Internet circuits in the Bay Area and Silicon Valley.
This means boom times for companies that make optical fiber. ``It's the Midas Touch,'' said C. David Chaffee, senior editor at Fiber Optics News, an industry newsletter. ``You build this stuff and people want to buy it,'' Chaffee said.
Among the smaller fiber suppliers, no company has made out better than Spectran Corp., based in Sturbridge, Mass., which had been struggling to post a profit in recent years.
But this year, Spectran has benefited greatly from the inability of the large manufacturers to meet demand. Corning agreed in February to subcontract $17 million worth of optical fiber business to Spectran over three years. Lucent followed in October with a $35 million deal.
On the strength of such contracts, Spectran announced a more than fivefold increase in third-quarter profits last week, reporting earnings of 17 cents a share on revenues of $16.2 million - which were up 62 percent from the comparable quarter last year. The company's stock has almost tripled in value since January, closing Friday at $17.125, up 25 cents, in Nasdaq trading.
Customers and manufacturers are counting on expansions at the major manufacturers to eventually relieve the shortage. By January, Lucent expects to complete a $300 million upgrade of its primary optical fiber factory in Atlanta, which will double the company's fiber-making capacity. Corning, meanwhile, plans by 2000 to double its production capacity by spending some $500 million to expand its main fiber plant in Wilmington, N.C., and build a new factory near Midland, N.C.
With most analysts expecting demand for optical fiber to grow by at least 20 percent annually for the next few years, the builders of the information highway may be scrounging for pavement for some time yet.
The entire 1997 cable production of Siecor Corp. - jointly owned by Corning and Siemens AG and the largest assembler of fiber-optic cable - is already contracted for, according to Joseph D. Hicks, Siecor's chief executive.
John N. Kessler, another KMI analyst, said, ``If production is increased at present rates, demand will be met sometime around the turn of the century.''
That could mean continued stress for buyers. But suppliers like Hund of Corning don't mind having customers clamor at the doors. ``As long as competition goes on and people feel the need to build networks,'' Hund said, ``that's great.''
00:04 EST NOVEMBER 4, 1996
The New York Times News Service via DowVision c 1996 Dow Jones & Company, Inc. All Rights Reserved.