ThomasNet’s newish blog, Industrial Market Trends, included a great piece last week on “Managing Spiking Metals Prices”. It is highly worth reading, as it refers to a white paper presented by the North American Die Casting Association (NADCA) on methods to cut risk out of spiking metals prices. Its recommendations are so worth reading that I’d like to recap them here:
1. Hedging — the notion is to reduce price change risk by purchasing in the futures markets. This is workable for metals that are traded on an exchange (e.g. the base metals, precious metals etc). It will, in the future, be available for a range of steel products as we have been reporting. But some organizations are not able to take advantage of hedging techniques because their volumes don’t justify hedging, the cost of the hedge is higher than the risk and for a host of other reasons that we could write about.
2. Fixed price contracting — The article mentions that this is done when a smelter accepts risk and manages the risk through its own hedging strategies in return for good pricing. But this option does not need to be deployed only between a smelter and its customer. This type of contracting also works further down the supply chain.
3. Formula pricing — The notion here is that a pricing index is used to lock in a price against specific committed volumes.
Of course, additional strategies can be deployed such as tying customer contracts to indexes when purchase contracts are also tied to indexes. For larger, global companies, buying and selling in local currencies creates a natural hedge. There are many variants to each strategy though not all firms can take advantage of each strategy.
We’ll follow-up within 24 hours on a second piece covering the use of indexes in metals contracting.