Buying Strategies in Falling Aluminum and Steel Price Markets

Recent key shifts in macroeconomic indicators could significantly impact both aluminum and steel prices. Historically, the best way for companies to protect themselves during times of uncertainty is to change buying strategies.
Most commodities have traded in a bull market for the past one and a half years. This has allowed companies of all sizes to see where their supply chains face the greatest gaps. Still, anecdotal evidence suggests that the fear of rising steel prices and ongoing supply chain constraints have caused buying organizations to “stock up” on materials. This has not only helped build inventory but also shore up supply. Now, many companies are seeing their orders slowing down.

Economic Indicators Suggest Slowing Demand

For instance, last month, the ISM Manufacturing Report or PMI continued its expansion. However, one troubling reading came from the new orders subindex, which dropped from 61.7% in February to 53.8% in March. According to MetalMiner, that data, along with falling durable goods orders and other key macroeconomic indicators, suggests a slowing economy.
To see our take on macroeconomic indicators, subscribe to the free MetalMiner Weekly update email. This week, the newsletter covers the three main macroeconomic drivers while analyzing their likely impact on metal prices.

Success Means Shifting Buying Strategies

It’s common knowledge that buyers are recovering from more than a year of supply woes and shipping constraints. Still, should the US economy slow, these organizations will need to reevaluate their sourcing tactics. Of course, the same would be true if we were to enter a recession.
Luckily, these companies can adapt using a wide range of buying strategies. Many of these can then mitigate holding high priced inventory during a slower or recessionary business cycle.

Some Strategies to Consider

1. Move off a scrap steel contract and consider contracting using a long-term index.
2. Avoid locking into long-term fixed-price contracts. This is especially important if metal macro trends change from bull to sideways or bull to bear.
3. Communicate conservative demand forecasts with suppliers on a longer-term outlook. However, they should share actual demand data for 4 and 8 weeks out (or further, if possible)
4. In rising markets, it makes sense to lock in contracts earlier vs. later as prices could still rise. In recessionary markets, the exact opposite holds true. That’s why companies should hold off on locking anything in for as long as possible.
5. Identify the KPIs that serve as their company’s “early warning signal” of slower demand. That means paying close attention to sales pipelines, time to close deals, pockets of softness, etc.
6. Companies should keep watch on their +/- volume tolerances from mills and service centers. A lot of people got squeezed on that when materials were in short supply. Now is a good time to re-examine those tolerances and work with suppliers to shore up a wider +/-.
7. Those companies that did stock up on inventory should see the next few months as an opportunity to burn through it. The market remains pretty strong, but it could look a lot softer three months from now. In other words: if you added a cushion to your safety stock, now’s the time to use it!
8. Mills and service centers that “acted incorrectly” with customers during the shortage phase should come back looking for business again. This would be a great chance to barter lower prices off the decreased demand. Likewise, suppliers that handled the bad times particularly well should be rewarded. After all, it’s all about relationships!

There’s Always More to Learn

No matter what the future has in store for the marketplace, there will always be opportunities to save and make money. In the end, it always comes down to preparedness, know-how, and a little willingness to innovate.
MetalMiner CEO Lisa Reisman and VP of Business Solutions Don Hauser will be offering up additional insights during a Wed, May 4 workshop. To learn even more strategies for dealing with a slowing economy, sign up to attend here.