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If you are a metals purchaser, it is imperative to mitigate risk and keep costs down whenever possible.
Of course, volatile market conditions can very quickly disrupt a buying organization’s approach, whether it’s due to the imposition of new tariffs, the coronavirus outbreak or the oil price plunge (just to name a few recent events with seismic impacts on metals markets).
With that said, changing market conditions require a flexible, knowledge-based approach, including knowing the best times to buy and which contract mechanisms to utilize for each market type.
MetalMiner CEO Lisa Reisman and Vice President of Business Solutions Don Hauser broke down all of the above and more during a webinar Wednesday, June 24, titled “How to Set Your Metal Purchasing Strategy in Volatile Markets.”
The full webinar recording can be listened to on demand from the MetalMiner video archive.
Reading markets in times of volatility; fundamental vs. technical analysis
“One of the things that’s most important in today’s market with coronavirus, production coming offline [and] online, we definitely forecast some volatility through at least the last half of this year,” Reisman said. “Knowing how to modify your strategy as those conditions unfold is going to be critical, particularly as it relates to how you maintain a competitive advantage.”
In other words, volatility is here to stay.
So what are consistently buyers’ biggest concerns? Price volatility is No. 1, Reisman explained.
“We’re coming up on annual contract negotiations for a lot of companies,” she said. “There’s a lot of concern in the market about volatility.”
As buyers try to read the markets, they should keep in mind that metals prices often tend to move in trends, or “packs,” she added.
Reisman also broke down the differences between technical and fundamental price analysis. Most companies, Reisman argued, use fundamental price analysis, which focuses on supply and demand and is better for long-term time frames but can be flawed in the sense that some price fluctuations do not necessarily have to do with underlying supply or demand.
With respect to the steel industry, for example, a fundamental analysis includes consideration of such data as number of steel mills in operation, number of lines that have been shut down, and automotive and shipbuilding demand, among other factors.
Technical analysis, on the other hand, relies on:
- All elements that impact price: political, economic, and market psychology and dynamics (in addition to supply and demand).
- An emphasis on actions, not causes.
“For example, if you’re a stainless steel buyer and you’re following Indonesian export bans of nickel pig iron, that may cause, if there’s a certain announcement, an immediate price spike if traders think that nickel may see a shortage,” Reisman said.
Contract mechanisms and timing buys
It’s one thing to monitor market movements — it’s another to know the best mechanism by which to execute a buy.
Hauser overviewed the primary types of steel contract mechanisms and the situations in which buyers might want to consider using them, those being: three-month trailing average, spot, fixed and scrap.
The trailing three-month average is the most widely used in the industry, Hauser said.
“You take the three-month average and that sets the price for the future three months,” Hauser explained. “Essentially what you’re doing is you’re just following the market.”
The advantage of using this mechanism is the certainty in indexing your pricing and the “ease of doing business,” Hauser explained: there’s no negotiating and the three-month term smoothes out some of the price peaks.
Spot contracting, meanwhile, is beneficial for buyers in a falling market.
“You don’t have to have a forecast for it, you don’t have to know what your demand is going to be,” Hauser said. “You know an order comes in and you need to make something, so you call up your supplier and say ‘hey, I need this material.’ They tell you what the price is, you say it’s too high and they tell you if you want the metal you pay for it.”
In addition to the various contracting options, Hauser emphasized the importance of maintaining good relationships with suppliers, particularly in times when there might be a supply crunch.
“In times when steel is starting to get tight, the only way you’re going to guarantee access to metal is relationship,” he said. “It’s great to have a contract that says you’re going to have steel, but when it comes right down to it and things are tight, if you don’t have that good relationship you can really get pushed off — they’ll push your lead times out, which doesn’t break your contract but it doesn’t get you your metal, either.
“If you have been a good buyer, a good customer, you can get your metal easier. If you’re in touch with your service centers or your mills and giving them as much visibility as possible to your forecast, that’s really appreciated and really rewarded.”
To access a replay of the webinar, visit the MetalMiner video archive here.
For those of you who are watching steel markets, we just released a guide on how to address pending price increases that might be useful.