True to our roots as sourcing professionals (once our day job, before we ran this website), we help companies gain a better understanding of the raw material inputs and other costs associated with the purchasing organization’s metal component, sub-assembly or assembly. We do this by breaking apart the constituent elements of whatever the client ended up buying.
Recently, a colleague dropped us a line wondering how the steel mills could raise prices when raw material costs appear on a flat-to-downward trend (we’ll address that issue as well). In the meantime, back in the days (pre-2003) when commodity prices fluctuated within a narrow band, the relevance of price data for industrial metal buying organizations appeared less than necessary. But volatility resulting from emerging market demand and the rise of commodities as major investment opportunities provided the impetus for the development of price data tools. Over the next couple of weeks we will drip out a series of posts examining ten or so methods buying organizations can deploy to get the most out of metal price data as our own service, MetalMiner IndX, has undergone a long-needed overhaul.
Primary Uses of Pricing Data
The methods range from the obvious, two of which we will cover today, and also the less obvious, which we will cover in follow-up posts.
The primary use of price data services, in our humble opinion, serves as a means for a company to track their purchasing performance against the market. In other words, daily price data helps sourcing managers and procurement professionals identify and track market trends and allow them to “time purchases whenever possible in the dips, as well as track company performance against the market.
Perhaps more importantly, daily pricing data allows the buying organization to explain to management why it took the buying decisions it did. Ten years ago, buying organizations barely tracked these kinds of movements, but today this represents the likely first step of any metal procurement organization.
A second rather obvious use of daily pricing data involves price escalator and de-escalator clauses used for contracting purposes. In rapidly rising markets, the use of these types of clauses within contracts grows, but when markets decline, so too does the use of these tools. Whereas price escalator and de-escalator clauses certainly offer buying organizations some assurance in terms of how their own contracts will follow underlying market price trends, distributors and producers often complain how they get deployed in practice, particularly when market conditions can make their use problematic.
Furthermore, indexes work well for certain products — particularly semi-finished aluminum and copper products and stainless products — when surcharges and volatility tie directly to base metal markets, but price correlation becomes weaker for items with higher value-add where the metal price falls below one third of the total cost of the item (e.g. pipe and tube products often fall in this category).
Moreover, if an organization consistently buys under market year-in and year-out, the use of these types of clauses would not help the buying organization’s cost position (though we’d argue most organizations don’t beat the market over time).
Pricing Data Not Accepted Here
Perhaps a trickier issue for buying organizations to manage involves the buyer and supplier to agree on the price index to use. Whereas the Midwest aluminum ingot price has become the de facto standard for pricing aluminum contracts, a steel contract has not become industry standard (we have seen buying organizations use CRU, the Steel Index, SteelBenchmarker and others) so gaining two-party agreement can become a challenge.
Nevertheless, as time goes on, we believe pricing standards will emerge.