I received a phone call this morning from a prospect interested in knowing our thoughts as to whether or not he should make some longer term purchases this week based on current prices for copper and aluminum. And I have to say, after being put on allocation for steel, receiving surcharge after surcharge, and paying price increase after price increase it is tempting to buy forward to lock-in some margin stability (something we haven’t seen for awhile eh?). But is that the right strategy?
Sourcing professionals have to weigh a whole host of variables into their strategic decision making. For example:
Am I under the gun to preserve cash thereby reducing my ability to either pay suppliers on time or in some cases, pre-pay?
Am I under pressure to keep inventory low and buy in small increments…just enough to match demand?
Is my Treasury Dept concerned that if they put a hedge in place it may be under water when the hedge expires because prices will come down further?
How long will this downturn be and when can I expect demand to pick up again which will subsequently push prices up?
How do I know if my category of metals (e.g. copper, steel, aluminum) is close to its marginal cost of production? And why does that matter?
These are just a few of the questions many sourcing professionals are grappling with during these tumultuous times. But here, we rely on the advice of time-tested investment advisors….dollar cost average! Forward buying obviously presents challenges in light of keeping low inventory levels and making minimal cash outlays. Depending on the specific market, one tried and true strategy involves the same principle as dollar cost averaging – take advantage of declining prices by buying on the spot market (as opposed to a long term contract) at current low prices. But know that categories such as aluminum which are currently trading at or below the marginal cost of production are close to or at their trough prices. Categories like copper, on the other hand, which closed at $5030 last night, though low compared to recent trends, is still far from the marginal cost of production. A metals purchasing strategy of buying one’s requirement as needed and over time taking advantage of dips etc probably makes very good sense.
But we caution buyers that many producers are rapidly cutting supply to meet diminished demand. For some segments, prices may firm but for others they still may be in a long term funk. We’ll continue to cover metals price trends in future posts. If you are interested in seeing additional analysis around a particular metal, drop us a line at lreisman [at] aptiumglobal [dot] com.