Metal Decision Trees, Sourcing Strategies and Risk Mitigation Methods

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We always appreciate the opportunity to collaborate with fellow experts in the metals industry. For those of you not familiar with Steel Market Update, you will find some great data and steel market insight. John Packard, publisher of Steel Market Update, kindly forwarded us an email question he had received from one of his readers in which he offered us the opportunity to address it. Here was the specific request:

“Any chance in one of your surveys, you would ask your OEM members to provide some of the information and “decision points” they use to manage and formulate their purchase strategy for steel and/or other commodities? I was talking with my boss about this, we continue to try and document a better decision tree for how best to manage our very large commodity spend i.e – copper, steel, and aluminum.  I always wonder what the other guys are looking at information wise, and what they take into account pertaining to formulating their “purchase strategies”.  The risk management of these items is at best challenging.

We could probably run multiple posts attempting to answer that question so we’ll start with the basics and move from there. First, we’d argue as we have previously on this site, that the variables companies (typically) use to track copper, steel or aluminum don’t go far enough to explain all of the volatility in today’s metals markets. Five years ago, nobody tracked ETF dollar inflows, nor did folks track the BDI (Baltic Dry Index). So the first acknowledgment sourcing organizations must make is this: our traditional methods of explaining the volatility are likely no longer sufficient. In other words, as sourcing managers, we know we must now look at other data and variables that previously, we ignored or never needed to pay attention to.

So let’s start with some basic “decision points and then fill in some blanks in a couple of follow-up posts. First, this whole discussion around “variables and obtaining a better understanding of these variables relate to the buying organization’s need to ask and answer the following question which we would suggest forms the basis for the first “decision in a decision tree:

“Is my ________spend in a flat, falling or rising market?

Let’s not minimize the difficulty organizations have had in just answering that one basic question. Many organizations, (service centers included) found themselves on the wrong side of that question having misread the market. The cost of holding and trying to work off high priced inventory or worst case, needing to unwind a hedge position gone horribly wrong, clearly we would argue getting that question right remains paramount.

In a follow-up post we’ll look at some of the other decisions organizations make depending on market directions.

In the meantime, MetalMiner will present its Q2 Steel Market Update Webinar which runs Tuesday, April 13 at 9:30 10:30 CDT and will cover topics such as market direction and strategies companies may wish to deploy for their steel categories.

–Lisa Reisman

Comments (3)

  1. Bob Malm says:

    Lisa – I have just read the article on decision trees, strategies and risk mitigation and the person asking the question hit the nail on the head. Having been in the metals market for over 20 years, basic indicators are well known and frankly most fall short from indicating future trends. Personally I want to look beyond the basics much in the same manner suggested in your response. I look forward to future posts that will shed some light on a more complex formula capable of providing a greater degree of accuracy.

  2. admin says:

    Bob thanks for your comments. We have a follow-up post on this subject coming out in a few hours. Also, our steel market update webinar (tomorrow) covers many of the other variables, in this case, that affect the steel market and we will also outline some new capabilities that get at the accuracy issue….LAR

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