What Should we be Doing Post TARP Bailout?

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As you sit and watch your  retirement and the kids college fund gradually dwindle before your eyes are there any words of wisdom available for how we should approach our metals purchasing strategies in these troubled times? Cautiously is probably the answer.

US and European GDP slowed in the second quarter and have probably dropped into negative territory in the third quarter as consumers have retrenched. Stories abound of banks being unwilling to lend to one another and increasingly unwilling to lend to companies and individuals. Doubts are being raised by well respected investors  about how effective Hank Paulson’s TARP bailout will be in averting a major retrenchment. It may (when it is finally agreed and implemented) save the US banking system from implosion but that in itself will not buy the US market or the world back to growth. There will be a flurry of optimism and both shares and commodities, heavily sold as fear has gripped the market, will bounce back with a temporary rally. But the fact is the fears of slowing growth and tighter credit are real and well founded. As we have seen from the sell-off in Asia, (and bear in mind China has been closed all week for holidays so this is largely a Japan/HK/Singapore sell off) investors there see the region every bit as exposed as we are in the west. Once the bailout is implemented it will bring some stability to the markets but it will not necessarily bring growth in the short term. We have enjoyed nearly 8 years of a bull market and we are now in for a global recession that could last well into 2009. To add a layer of complexity, buyers may be purchasing a commodity in dollars even though the underlying cost drivers are in some other local currency.   So the behavior of the Dollar against the Euro, Yen, Pound, RMB and so on will also impact the price we pay. This factor is painfully apparent to buyers in those markets as they daily convert their dollar priced imports into local currency but it is an often overlooked cost driver for US buyers believing that just because their supplier sells in dollars they are somehow immune from the fate of the dollar. If the dollar weakens be sure the price will rise, may be not immediately but in time it will.

We do not have a crystal ball and anyone who tells us they do should be treated with scepticism but our expectation is prices will be volatile, displaying peaks and troughs for months to come but that a return to fundamental stability will not come until into next year. In the meantime, metal buyers should consider taking advantage of price falls to cover forward only as far as they can see their own sales demand requires. For those firms with reliable order books and reasonably steady material demands prepare the ground by looking strategically at your annual spend and aggregating demand across like categories and researching supply options. Many supply options have opened and closed over the last few months and more will change particularly if the dollar should continue to strengthen. Strategic sourcing is a process best approached with careful planning and much groundwork; take the opportunity to do that now, the supply market will soon be very receptive to a clearly articulated strategic sourcing initiative.

–Stuart Burns

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