Today, I thought I would continue my earlier piece on managing metal pricing volatility. You can find that article here.
Have you ever received the advice of a consultant who suggested that one way to mitigate metals cost increases is to develop a contract pegged to an index? Well, truthfully, we’ve given out that advice, so let’s see what these indexes actually cover and who can take advantage of them.
The most famous of the metals exchanges (in which daily price information is published) is the London Metal Exchange. There, a company can participate in the largest metals futures market for a range of base metals including steel, nickel, copper, aluminum, zinc, lead and tin. Most recently, the exchange added steel (billets specifically), which we have previously reported on here and here. The last article also references the hot rolled coil steel futures market with Nymex. These futures markets, like the LME and Comex, are viable if you are buying primary metals, but rarely correlate well for semi finished metals.
The Nymex HR Coil contract may end up eventually working for folks who are actually purchasing hot rolled coil, but what should everyone else do? In truth, many metals sourcing professionals rely on various publications to broadly track market trends, but they are not able to actually use a particular data source for contract negotiations for a variety of reasons. These reasons relate to any one or all of the following:
- The data is not timely. In other words, the data that is in the index is a few weeks old or in many cases a few months old. It’s not updated daily. Ask any steel buyer how good the pricing is from December 2007 in today’s market.
- The data is actually an aggregation/grouping comprised of the average of several price points for a particular region or an aggregation of price points for a range of products. Steel long products refers to several items. Latin America encompasses many countries. There are price differences among countries, metals, even points of delivery within a country etc. For these reasons, it may be difficult to obtain the support of a supplier to adhere to such an index.
- Last, many of the metals publications do not provide pricing for industrial products; in other words, the semi-finished or finished products regularly purchased by manufacturers. Copper coil or aluminum sheet are not as widely reported as primary copper or aluminum ingots.
But perhaps the biggest limitation in using indexes is the lack of global information that addresses 1-3 above. When we look at consumer goods companies and retailers who purchase finished products that contain metal, we see they often purchase offshore. As we indicated in an earlier post, while the dollar is seeing some of its darker days (essentially squashing imports), the US still brought in over $18b worth of metals products during the first two months of 2008 alone. Where is a pricing index when you need one?