Last week we discussed some of the ways industrial metal buying organizations might use daily price data services. We covered some of the more obvious use cases including tracking a given company’s purchases against the market and using the intelligence to conduct more effective contract negotiations with suppliers. And as promised, with this post we aim to cover some of the more advanced use cases, though we’d still contend that some of these more advanced applications remain in the realm of “would like to have as opposed to “already using, so to speak.
Forecasting Remains the Holy Grail
Without a doubt, when asked why a buying organization would like access to a pricing service, invariably the organization will say it wants specific metal forecasts. Some even express an interest in running statistical regressions to build out predictive modeling and forecasting tools on their own.
Metal market volatility, which exploded beginning in 2003, has transformed industrial metal buying organizations. Savvy organizations have moved up a curve from simple purchasing and requisition while paying minimal attention to price trends, to intelligence and analytics to better understand cost factors impacting metal prices, seasonality trends and market dips; then to outright forecasting to better time purchases and deploy strategic sourcing strategies.
To buy forward or purchase on the spot market, to lock on a long-term basis, or to commit specific monthly tonnages have profoundly altered the metal-buying process. In an environment with little volatility, organizations can ignore these considerations, but when markets move in double-digit percentages in a period of eight weeks or less, buying organizations need to become far more strategic.
Correlations Provide Useful Intelligence As Well
For those organizations less interested in trying to predict metal prices with any degree of accuracy yet understand that correlations also provide insight into underlying demand, the ability to access a daily price service allows buying organizations to model and visually identify those correlations that help dissect specific market trends.
For example, just as the steel producer industry closely tracks housing starts, the ABI (Architectural Billing Index) and monthly automotive sales, buyers of stainless steel products can plot key raw materials, including ferro-alloys and nickel, to help monitor underlying stainless dynamics and potential impacts on surcharges.
In addition, new metal pricing tools will allow buying organizations to cross-reference multiple raw materials so buying organizations can understand underlying base metal trends, for example, as compared with iron ore prices or precious metals. As web-based tools, price services can provide a far more comprehensive intelligence platform for the industrial buyer.
Taking it One Step Further
But to really make the most of metal price data services, industrial buying organizations will want to embed the data with existing business intelligence, ERP and sourcing/procurement systems to conduct more sophisticated and robust spend analytics. The combination of metal pricing data overlaid with a company’s actual purchases provides the type of intelligence and insight to allow companies to identify hedging opportunities, better time purchases, quickly identify when a company should buy on the spot market (e.g. falling markets) as well as put in place contacts with escalators/de-escalators.
In a follow-up post, we’ll identify how producers might use daily price data services, as well as examine the corollary — how industrial buying organizations can use the same data for slightly different purposes.