Our upcoming webinar – scheduled a week from today – is sure to create some fireworks. We couldn’t resist getting some commentary on spot-market purchasing from our metals procurement specialist, Raul de Frutos, to help light the fuses. We threw a few questions at Raul, getting at what a price risk management strategy for metals buyers should start with.
Q: When is sourcing via the spot market risky?
A: Basically, if you are doing one of these two things, you are taking a risk:
- Buying metal without knowing how much you will sell it for. If you don’t have a price fixed with your customer (or the ability to pass on any and all declines in metal prices to your customers), your risk is any price decline from the moment you buy the metal until the moment you sell it.
- You make a sales agreement without knowing what the cost of the metal will be by the time you need to purchase it. In this case, your risk is any metal price increase from the moment you have a sales contract until you actually purchase the metal.
Q: Is there a way to be risk-free when buying on the spot market?
A: The only way is to always have a fixed sales contract by the time you make your metal purchases. This is almost unrealistic, since organizations almost never know their future demand with certainty and often have long lead times, and are not able to agree to a fair price with customers/suppliers, etc.
Q: So if metals buyers are taking risks, does that make them traders/speculators?
A: Pretty much. The only difference is that the trader/speculator is willing to take the risk, while the metal buyer has no choice. The trader starts with no gain, and speculates the market trying for a profit. The metal buyer already starts with a gain (assuming his business is profitable) and speculates to maximize that gain.
Q: What are the key things that successful traders/speculators do to manage their risk?
A: One of the keys for successful trading is to always know your downside risk. The market is unpredictable and prices can always go in the opposite direction regardless of how good your analysis is.
Successful traders always plan ahead, and they have a solid strategy with a set of rules that tells them how to react to the market. So by being disciplined to their set of rules, they always know when to enter or exit a trade. In this manner, they never get caught in mental games, avoiding big losses.
Q: What can metal buyers learn from it?
A: Buyers can’t avoid the risk implied in purchasing metals. Instead, buyers need to accept that there is a risk and then implement a solid strategy to best deal with it. By having a consistent strategy with a set of rules, metal buyers know the right time to buy and avoid making wrong decisions caused by overwhelming panics when markets behave in unpredictable ways.
Our goal at MetalMiner is exactly that: not to make predictions, but to provide buyers with the market intelligence and the set of rules to make sound purchasing decisions.
Agree or disagree agree with Raul? Leave a comment!
And don’t forget to register to hear how Lisa Reisman and Jason Busch weigh in on this next Monday, June 29, at 12 pm ET/11 am CT, for “3 Bids and an Award: Are You Speculating When You Buy on the Spot Market?“