The most popular question by far that we receive here at MetalMiner goes something like this: “What do you think the price of X is going to do this year?” Invariably, the answer leads to a discussion around what factors impact a particular metal’s price and by how much each factor impacts that price.
Minds far smarter than ours have developed sophisticated forecasting models, many of them using their own prior demand data along with indexes, external macroeconomic variables such as forex, trade data, GDP and PMI data, among many others. We here at MetalMiner have even tempted to build a forecasting engine only to realize that we lacked the most necessary component — an underlying data set (which we have now built as part of our soon-to-launch MetalMiner IndX℠ application).
Luckily, some of the smart minds just referred to have taken forecasting to the next level by incorporating fundamental statistical and technical analysis of relevant market dynamics, along with the qualitative analysis of primary and secondary market research. In addition, rather than try to predict the next hurricane, for example, the models allow sourcing organizations to add premiums or apply discounts to prices based upon similar historical events.
These types of advanced forecasting and modeling capabilities serve as the core of our upcoming conference, Commodity Edge: Sourcing Intelligence for the New Normal, and why we welcome organizations such as The Smart Cube as a Silver Sponsor. Omer Abdullah, Co-Founder and Managing Director will lead Monday’s Executive Roundtable discussion, “Forecasting, Statistical Modeling and Building Internal Competencies.”
Perhaps most important, sourcing organizations want to know how to use these forecasts, which also go through a range of stress tests to ensure predictive capability. According to The Smart Cube, the forecasts, which include both pessimistic and optimistic outlooks, help companies with budgeting and contract management, negotiation and market assessments.
Moreover, the forecasts allow the sourcing organization to better understand the potential impact of each of the variables, as well as allowing for customization based on the user’s unique subject expertise or knowledge of how the variables impact the underlying forecast.
But what we find most interesting about The Smart Cube’s methodology and approach involves how the company helps sourcing organizations identify hedging options for materials for which currently no hedging products exist, by leveraging related products and indices via cross-hedging.
According to The Smart Cube, “Cross-hedging involves hedging the concerned commodity by taking an offsetting position in another commodity with similar price movements by incorporating an optimal hedge ratio,” and the result provides companies with the opportunity to lock prices and minimize volatility.
And at the end of the day, minimizing volatility has become the mantra for implementing successful sourcing strategies. Join us for Commodity Edge: Sourcing Intelligence for the New Normal if your organization would like to minimize price risk and commodity volatility.