Not so long ago on a fall night here in Chicago, I had the opportunity to meet up with a couple of folks from a steel producer.
What they told me then sounded a little scary — they suggested the “A” word — but not nearly as scary as current market conditions suggest.
In metals markets, the “A” word does not contain three letters.
It does, however, connote something far worse for many metal buying organizations: allocation!
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Allocation markets cause sleepless nights for procurement professionals because, without material, lines get shut down and businesses fail to operate profitably.
Undoubtedly, the dreaded “A” word is upon us, particularly for steel markets.
Back in May of this year, toward the end of the last COVID-19 “surge,” MetalMiner contemplated what could happen to steel prices once demand came back onstream.
MetalMiner saw two scenarios: a gradual increase in demand followed by panic buying or a rather dramatic increase in demand led by the automotive industry, combined with slow mill restarts and historically low starting inventory levels held by service centers.
We assumed the first scenario, but obviously the second ensued.
Here is a link to that brief report and, more importantly, what buying organizations could have done back in May to shore up steel supply. Click the link to see what MetalMiner suggested back then.
Volatility is the name of the game. Do you have a steel buying strategy that can handle the ups and downs?
What should buying organizations do now?
In the meantime, buying organizations can also avail themselves of the following strategies:
- Beg and plead. Seriously, most service centers have limited to no available spot tons in this allocation market. Work with your suppliers closely, particularly if you are on contract, to ensure your demand conforms with what the service center (mills) are producing on your behalf.
- Lean on your relationships. Make sure that your forecasts are super accurate and you know precisely what you have in inventory.
- Continue to look at that information on a weekly basis. Overcommunicate with your service centers to let them know precisely what you need (as well as what you don’t need). Ideally, your demand maps back to exactly what the service center is running.
- If you have mill contacts, make sure you are touching base frequently as well. Do so at least once a week. Communicate schedules, materials, what your factories are doing, and how much WIP and safety stock you have available. Your job as the commodity manager is to make sure you don’t run out of material!
- Make sure that you are a great customer! This means you understand it’s a seller’s market and your goal is to secure supply, not try and negotiate price!
- If your buy is large enough, explore import options, either directly or through your service centers. This option may not work for everyone but could provide relief after Q1.
Looking ahead — what’s next for the allocation market?
Some believe the shortages will ease toward the end of Q1 (and prices as well). However, others believe the combination of social distancing requirements at steel producers, union rules, the fact that vaccines will not be widely available likely until springtime, and order backlogs now running 20 weeks could keep steel prices elevated for a lot longer than anyone anticipated.
For more information on what you should be paying for various grades of steel, check out our should-cost models by scheduling a MetalMiner Insights demo!