On Space Launch Complex 576-E at Vandenberg Air Force Base in California, Orbital Sciences workers monitor NASA’s Glory upper stack as a crane lifts it from a stationary rail for attachment to the Taurus XL rocket’s Stage 0. Source: NASA
Following investigations regarding the cause of two launch failures in 2009 and 2011, NASA pointed the finger this week on faulty materials from aluminum manufacturer Sapa Profiles, Inc. (SPI).
“NASA Launch Services Program (LSP) investigators have determined the technical root cause for the Taurus XL launch failures of NASA’s Orbiting Carbon Observatory (OCO) and Glory missions in 2009 and 2011, respectively: faulty materials provided by aluminum manufacturer, Sapa Profiles, Inc. (SPI),” NASA said in a release.
“LSP’s technical investigation led to the involvement of NASA’s Office of the Inspector General and the U.S. Department of Justice (DOJ). DOJ’s efforts, recently made public, resulted in the resolution of criminal charges and alleged civil claims against SPI, and its agreement to pay $46 million to the U.S. government and other commercial customers. This relates to a 19-year scheme that included falsifying thousands of certifications for aluminum extrusions to hundreds of customers.”
According to NASA, the failed Taurus XL missions resulted in a loss of more than $700 million and “years of people’s scientific work.”
Upon investigation, NASA concluded the crafts’ launch vehicle fairing, a “clamshell structure that encapsulates the satellite as it travels through the atmosphere,” had failed to separate on command.
“From NASA’s investigation, it is now known that SPI altered test results and provided false certifications to Orbital Sciences Corporation, the manufacturer of the Taurus XL, regarding the aluminum extrusions used in the payload fairing rail frangible joint,” NASA said. “A frangible joint is a structural separation system that is initiated using ordnance.”
SPI, now known as Hydro Extrusion Portland, Inc., recently pleaded guilty to one count of mail fraud and reached a settlement with the Department of Justice’s Civil Division to pay $46.9 million.
SPI is owned in a 50-50 share purchase agreement between Norwegian conglomerate Orkla ASA and Norsk Hydro, after Hydro acquired a 50% interest in SPI in 2017 for NOK 27 billion.
“As part of the share purchase agreement between Hydro and Orkla ASA, Orkla ASA will indemnify Hydro for 50 percent of the liability in relation to the DOJ’s investigations,” Norsk Hydro said in a release April 23. “As communicated in Hydro’s 2018 Annual Report on March 15, 2019, a charge of NOK 157 million has been included in Hydro’s Q4 2018 figures related to the agreement with DOJ.”
In the aftermath of the Section 232 tariffs on steel and aluminum going into effect in March 2018, we heard and read a lot about some of the largest American OEMs and their business challenges.
But what’s not known or reported as much in the mainstream is what manufacturers have been doing to strategically mitigate tariff risk, or how their various business units and organizations put practices in place to hedge against that risk.
“We’re flexible, and we can move quickly now that we have started to qualify additional materials,” said Matt Marthinson, VP Supply Chain at JB Poindexter & Co., Inc. “So I like our chances much better than where we were just two years ago.”
A company like that has to be flexible — as a large-volume metals buyer, JB Poindexter is the largest truck manufacturer in the U.S. of Class 3 through Class 7 trucks, including the majority of UPS, FedEx, U.S. Postal Service, Penske and Ryder trucks across North America, according to Marthinson.
In a conversation with Lisa Reisman on our current podcast series, “The Maker-to-User Trend in the Time of Tariffs,” Marthinson lets listeners in on how an established transportation industry manufacturer with significant exposure to commodity risk views the tariff landscape, both now and into 2020.
Listen in!
According to his company bio, Matt Marthinson is the leader for the Supply Chain transformation initiative at JBPCO, which includes partnering with the business owners to consolidate and leverage spend across all business units. He has over 25 years of comprehensive business achievements and expertise in Lean Manufacturing Operations, Production Planning, Materials Management, Procurement, Transportation and Logistics, Sourcing and Supply Chain with Kaiser Aluminum, Honeywell, Alcoa and Hubbell Incorporated, most recently as vice president of strategic sourcing. Learn more here.
Maker-to-User in the Time of Tariffs: Background
After the U.S. Commerce Department’s Section 232 findings in early 2018, President Donald Trump took action — and the rest is history.
This new podcast series takes a closer look at the U.S. manufacturing landscape in our present time of trade tariffs, and how manufacturers themselves are affected by the tariffs (winners and losers).
For example, just over 90% of manufacturing industry respondents in a recent, informal MetalMiner poll indicated that the Trump tariffs have hurt their respective businesses, via increased material costs, inventory woes and longer lead times, among other effects.
However, other manufacturers — for example, Honda — have posted healthy profits over the last year.
The London Metal Exchange today announced it is launching a formal consultation on proposed rules for “the application of responsible sourcing principles to all LME-listed brands.”
“Our comprehensive market engagement exercise has revealed strong support for the LME taking action on this important topic,” LME CEO Matthew Chamberlain said. “The LME’s role is now to appropriately balance the differing views of market stakeholders when implementing our requirements – and we are pleased to have been able to do so in today’s proposals. For example, based on the constructive feedback of civil society organisations, we have enhanced our transparency requirements, and at the same time, we have respected the views of producers who have called for more achievable timelines and a clearly-defined reporting process.”
The proposed rules call for every LME-listed brand to undertake a Red Flag Assessment — which is based on guidance from the Organization for Economic Co-operation and Development (OECD) — by the end of 2020. Brands flagged for potential sourcing issues would then be classified as a “higher-focus brand” and will be audited by the end of 2022.
More attention has been given to ethical sourcing in recent years. For example, much attention has been given to the sometimes murky cobalt supply chain and labor conditions in the Democratic Republic of the Congo (where a majority of the world’s cobalt is mined).
“Global consumers rightly demand action on responsible sourcing – and our industry must listen,” Chamberlain said. “The LME is taking action because it is the right thing to do, but also because the value of our market is based on providing metal which is acceptable to those consumers, and because the metals sector looks to us to provide leadership on these important topics. Our role will necessarily be to forge a consensus between the potentially divergent views of various stakeholders – and this role is never popular. Nevertheless, we are committed to playing our part in this movement.”
In October, the LME released a position paper related to responsible metals sourcing. That paper outlined a timeline for compliance, including specific standards for cobalt and tin.
“For cobalt and tin, chosen standards must be identified by the fourth quarter of 2019 and full compliance with standards will be required by the end of 2020,” the LME announced in October. “For all other higher-focus brands, standards must be identified by the fourth quarter of 2020 with compliance by the end of 2021. Non-compliant brands will be eligible for delisting once the relevant deadlines have been passed.”
Hurricanes Harvey, Irma, Maria, Florence and Michael all battered the United States in the last year, impacting Texas and Louisiana, Florida (namely the panhandle and south Florida), Puerto Rico, and the Carolinas.
According to FiveThirtyEight, Hurricane Harvey last year dumped approximately 27 trillion gallons of water on Texas and Louisiana last year, leading to a whopping $125 billion in damages.
When it comes to natural disasters, like hurricanes, the question is not “if” but “when.”
For manufacturers, natural disasters — whether it’s hurricanes, earthquakes, wildfires, or something else — pose a number of significant hurdles to supply-chain stability. For example, transportation of supplies can become impossible for weeks at a time as a result of flooded roadways and production on needed materials, like metals, can come to a halt in affected areas.
We spoke with Resilinc founder and CEO Bindiya Vakil earlier this year about risk mitigation, broadly with respect to the Trump administration’s Section 301 probe and the resulting tariffs on Chinese products. Vakil emphasized the importance of data in decision-making, namely in the form of proactive measures, as opposed to reactive, spot decision-making.
While it’s true that natural disasters, like the aforementioned hurricanes, don’t happen particularly frequently, they can have a deep and long-lasting impact on supply chain stability.
Grain-oriented electrical steel (GOES) prices fell for the second month in a row, with multiple large power equipment manufacturers requesting exclusions from the Section 232 tariffs.
What makes these requests noteworthy involves the arguments made by each of the firms. One of the most interesting arguments pits two different firms on opposite ends of the national security argument – Eaton Corp (parent company of Cooper Power Systems) and AK Steel.
The Section 232 exemption request form asks a specific question with regard to whether the steel is used to support national security requirements. Cooper Power responded by stating the materials in the exemption are used to make transformers for the electrical grid, of which infrastructure is considered essential to national security: “This product allows Cooper Power Systems, LLC to meet federally maintained efficiency requirements in Liquid Filled Transformers as published by the D.O.E.”
The Cooper Power request involved, “chemically etched or mechanically scribed Domain Refined Grain Oriented Electrical Steels, capable of retaining domain refined properties post anneal, used in the manufacture of Distribution Transformers,” according to its exemption request. Cooper Power argued “the only domestic producer of electrical steels in the U.S., does not manufacture a Domain Refined Electrical Steel capable of being annealed after Transformer core production, while still retaining the Domain Refined properties.”
Ironically, Metglas, and not AK Steel, offered a rebuttal to the Cooper Power exclusion request that specifically addressed alternative products, notably amorphous ribbon, that could meet DOE requirements. Metglas also challenged the volumes Cooper Power had indicated – specifically that the volumes requested in the exclusion far exceed Cooper Power’s actual volume requirements.
Meanwhile, ABB’s exclusion request cited insufficient U.S. availability of 27M-0H, which it claims is not manufactured in the U.S. (This grade is high-permeability GOES.)
AK Steel — the only mill that challenged the ABB exclusion — made several arguments in its rebuttal, including:
ABB has moved away from several suppliers in the US and globally over the past few years. Changing suppliers and materials seems to be less of a concern to ABB when it achieves a financial return by purchasing foreign GOES. AK Steel is, and has been for many years, the largest supplier of GOES to the U.S. market. ABB knows AK Steel’s product very well and both ABB and its customers can plan to incorporate AK Steel GOES with little effort or hardship, just as they have in the past.
The company goes on to say, “As the largest domestic producer of GOES, a large percentage of transformers utilize AK Steel GOES products and it is a very well-known and broadly utilized product, both by ABB and their customers.” However, neither the buyer or supplier has explained fully why the GOES market appears more opaque than many other steel markets.
The Takeaway
In reality, power equipment manufacturers deploy a more multifaceted approach to the GOES sourcing decision. In fact, multiple GOES grades can meet various requirements as established by the DOE but the ultimate award decision made by a buyer considers many variables, such as: core loss, regulatory requirements, and the price arbitrage among alternative GOES products at any one given time. Together, these variables impact the buying decision.
From a sourcing perspective, manufacturers want and need the ability to maintain flexible sourcing options, not only to mitigate risk but to minimize the pricing power of a monopoly supplier. Moreover, the transformer market is dominated by global players who can easily shift production of transformer cores elsewhere (as they did after the unsuccessful 2014 anti-dumping case brought by AK Steel).
Buying organizations will continue to shift production away from the U.S. if the sourcing equation does not make economic sense. Regardless, should Big River Steel indeed move into this market — as many hope that they will — AK Steel will need more than Section 232 to defend its market position.
In a subsequent post, MetalMiner will address the exemption request from Posco and the Section 301 tariffs.
Exact GOES Coil Price This Month
The U.S. grain-oriented electrical steel (GOES) coil price fell for the second month in a row from $2,857/mt to $2,763/mt. The MMI fell seven points from 207 to 200.
The GOES MMI® collects and weights 1 global grain-oriented electrical steel price point to provide a unique view into price trends over a 30-day period. For more information on the GOES MMI®, how it’s calculated or how your company can use the index, please drop us a note at: info (at) agmetalminer (dot) com.
In August 2017, the Office of the U.S. Trade Representative (USTR) launched a Section 301 probe, which sought to assess unfair Chinese trade practices with respect to technology transfer and intellectual property. The office’s findings led to additional tariffs on some 1,300 Chinese products valued at $50 billion. In early July 2018, a first tranche of $34 billion in tariffs went into effect, with the remaining $16 billion being approved in August. In addition, President Donald Trump instructed USTR Robert Lighthizer to draw up a list of additional Chinese products, worth approximately $200 billion, to potentially target for duties.
The proposed product list includes exports from vaccines to nuclear reactors to numerous forms of metals used by manufacturers. With such an extensive list of potential new duties, companies have their work cut out for them identifying supply-chain risks, especially with China’s deep integration into the murky lower tiers of many supply chains.
To help assess the risks and recommended preventative strategies, MetalMiner sat down with Bindiya Vakil, CEO and founder of Resilinc, to discuss the implications of the Section 301 investigation and how supply-chain risk and resiliency solutions such as hers are helping companies prepare for impacts.
For businesses looking to navigate the tariffs and be proactive about limiting their exposure to risk, Vakil says it’s all about one thing: data.
MetalMiner Co-founder/Executive Editor Lisa Reisman presents during MetalMiner’s Annual Budgeting Workshop, held on Wednesday, July 25, in Chicago.
MetalMiner® hosted its annual Budgeting Workshop on Wednesday, July 25, in Chicago, during which Executive Editor/Co-founder Lisa Reisman, Procurement Forecast Analyst Irene Martinez Canorea and Co-founder/Editor-at-large Stuart Burns shared their expertise on various metals markets and thought processes for procurers to consider as they attempt to lower their metals spend.
Metals procurers attended the workshop looking for answers, with many stating that, unsurprisingly, this year’s escalation of trade tensions — particularly in the form of tariffs — has complicated things for them.
Reisman first broke down the components of an individual metal price, explaining that 40% of the price is attributable to overlying commodities and 30% to industrial metals.
“Despite the recent downtrend that industrial metals have shown, we at MetalMiner still remain bullish,” she said. “We have not — and this is different from some of the analysts that have actually called a bear market right now — we still have not shifted into a bear market. We think we are in a bullish mood and this is a correction.”
She added that rises in aluminum, copper and lead price rises in 2017 did not come as a surprise.
“We were able to advise, we gave the signal ‘Hey, we think markets are going up,'” she said. “We actually gave our long-term buy signal on aluminum in August of last year and we said to buy forward in a nine-month buy.
“We say nine-month buy, but obviously every company has to adapt that to their strategy.”
Of course, other factors come into play. For example, with respect to aluminum, the market went into a frenzy in April on the heels of U.S. sanctions against Russian firms and their owners (including Oleg Deripaska and aluminum giant Rusal).
“The whole aluminum market went into shock,” Burns said. “Prices skyrocketed and you’ve got this spike in pricing — that has nearly worked its way out of the market. As it’s worked its way out, prices have come back down again back to where we were at the beginning of April.”
Speaking of geopolitical activity, the rise of trade remedies in the form of tariffs has been a complicating factor.
In the U.S., those tariffs have come to be primarily via three statutes: Section 201, Section 232 (used to deploy the steel and aluminum tariffs) and Section 301 (currently being used to target Chinese imports, in response to U.S. allegations of intellectual property theft and unfair business practices on China’s part).
With respect to steel, Reisman explained that it was somewhat of a surprise to many around the world that the tariff would be applied universally (although quotas were eventually negotiated for South Korea, Argentina and Brazil).
As for Section 301, under the purview of the Office of the United States Trade Representative (USTR), a 25% tariff on $34 billion worth of goods went into effect earlier this month. In addition, last week the USTR held public hearings regarding an additional $16 billion. On top of all that, President Trump directed USTR Robert Lighthizer to draw up a list of an additional $200 billion worth in products, which would be hit with a 10% tariff. That list will also undergo a review process, with public hearings scheduled for Aug. 20-23.
So, for now, Reisman advised the procurers in the room to make sure to monitor and manage the two tranches of tariffs totaling $50 billion (the $34 billion already in place and the $16 billion under review).
Reisman, in explaining how MetalMiner looks at markets, took the time to do some mythbusting on various subjects.
For example, the cost of raw materials like iron ore, coking coal and scrap are tracked closely by many companies; however, she said raw materials are highly irrelevant to MetalMiner’s forecasting.
“There’s no correlation between a rising price market and what those raw materials are doing,” she said. “The correlation breaks down.”
Meanwhile, Burns addressed the forward price curve and why it is not a good predictor of where metals prices are going to go.
“The forward price is actually a reflection of the cost of buying that metal today at stock price, holding it for three months or six months, paying the warehouse fees and insurance … if you like, it’s the premium the consumer has to pay to insure that they get a fixed price in the future — it’s an insurance policy. There’s no relevance of where the market will be in six months’ time.”
In addition to a review of the state of individual metals markets — as seen in MetalMiner’s Monthly Metals Outlook report — the MetalMiner experts delved into three main factors driving long-term forecast thinking: oil, China and the U.S. dollar.
The dollar has recovered somewhat, buoyed by a two-month uptrend, but remains in a long-term downtrend. Historically, commodities and the dollar are inversely related (although 2017 featured some anomalies that bucked that historical trend).
“We’re not calling the dollar bullish yet,” Reisman said. “If we were to see the dollar … shoot up, that’s when we might change our point of view and say the dollar is bullish.” She added tariffs and sanctions could have further impacts on the dollar, which remain to be seen as those actions play out.
As for China, U.S. tariff actions have certainly had an effect on the market. China posted 6.7% growth in Q2 (down from 6.8% in Q1), marking the weakest pace of expansion since Q3 2016.
Of the three factors, oil is particularly interesting right now.
“Higher crude oil prices, generally speaking, support higher metal prices,” she said. “That correlation is super important to be watching. If you suddenly see oil tanking, that could be a precursor to a falling metals market.
“As long as oil prices are over that $60/barrel level, buying organizations can continue to expect higher crude oil prices.”
In short: pay attention to oil.
“Oil should be on something on everybody’s radar if you’re a metal buyer, for sure,” Reisman said. “It tells you a lot.”
On a macroscopic level, Reisman concluded with some things that could make things go crazy and possibly yield a shift away from the generally bullish state of markets.
One example, she noted, is the potential imposition of the aforementioned $200 billion in tariffs, not to mention the imposition of any other tariffs in the future.
On the other hand, if any of these trade actions get reversed in some form or fashion, that will also have an impact.
“If Canada, Mexico and the E.U. are exempt from tariffs, that also is going to change the game significantly,” she said. “It’s not even a black swan but it will impact the price, we know that for sure.”
Sign up for a free trial to MetalMiner’s Monthly Metals Outlook. Also, keep an eye out for MetalMiner’s Annual Metals Outlook, set to be released in September.
In the report titled, “Digital mining: the next wave of business transformation” — not to be confused with the mining of data — it says digital maturity across the mining and metals sectors means that current digital solutions are merely “functional or siloed,” and only address parts of the value chain.
Global mining companies have started to make some headway in using digital technologies to improve productivity. But, as the report says, focusing on productivity alone is not enough to generate competitive advantage. Companies need to adopt “a more cohesive, end-to-end approach to integrate digital initiatives,” the report states.
In this paper, the E&Y team has explored more of the “how” to commence a digital transformation rather than the “why” businesses should embark on the change.
The report has identified around 60 digital themes and initiatives across the sector, though it finds few examples of a clear, integrated and businesswide approach among mining and metals organizations.
The team has proposed a “wave approach,” which seeks to balance risk and return, and the need for rapid action but also thoughtful planning for players in this sector.
“Mining & metals has so far lagged other sectors in the realm of digital effectiveness,” said Anjani Kumar Agrawal, partner and national leader for metals and mining at Ernst & Young. “The value from digital will only be realized when companies change how they work, rather than succumbing to the lure of individual technology programs and pursuing local optimization, which is not necessarily transformational.
“While a revolutionary approach to digital would be too disruptive, we believe companies with mining activities should adopt a progressive, multiyear strategy that also accounts for business risk and the primary drivers of value.”
Paul Mitchell, Ernst & Young’s global mining & metals advisory leader, stressed the importance of adaptability.
“We see the end-state vision for the mining sector as constantly changing and businesses will need to be ready to adapt and change course as required,” Mitchell said. “While we don’t believe the sector will see radical disruption, the opportunity for new entrants to disrupt existing players poses a real threat. Market leadership can be lost quickly if dominant players respond slowly or ineffectively to industry disruption and external changes. However, the pathway through the waves of digital transformation should not be viewed as inflexibly sequential or static.”
The “waves” that are referred to in the E&Y report are a series of digital transformation waves, which the agency feels “is the optimal way to transition a business from current to future state” and steadily introduce more digital hotspots and interconnections, all as part of a coherent overarching strategy.
Focusing on productivity and profitability alone is not enough to generate competitive advantage, say the experts, but focus must be given to innovation, too.
This approach is structured around these key components:
Digital pre-start: building out connectivity to prepare for digital transformation, which typically involves investment in infrastructure, communications and data.
Wave 1: activities that focus on the productivity or performance improvement agenda, and are typically operated within a single function. At this stage, digital can enable a mining operation to manage inherent variability & move toward manufacturing levels of productivity.
Wave 2: these activities are broader & span the whole value chain & include initiatives to better manage margin through interactions with customers & suppliers.
Wave 3: this stage refers to the rise of disruptive factors that may create significant changes in how the sector operates & may require a step change in business strategy.
This new report comes in the wake of another report, ‘Top 10 business risks facing mining and metals 2017–2018”, in which E&Y identified “digital effectiveness” as the No. 1 risk facing the mining and metals sector.
The full E&Y report, “Digital mining: the next wave of business transformation,” is available here.
That’s why, in a recent case study — titled “Using Advanced Sourcing Optimization to Negotiate Metal Contracts” — an automotive supplier approached MetalMiner for advice on its annual contract negotiations for carbon steel and stainless steel. Using Keelvar sourcing optimization software to evaluate contract awards and supply options, the study assessed both carbon and stainless.
The automotive supplier sources parts and components used by General Motors, Ford, and others, with a product mix including: multiple stainless steel alloys 300/400 series in coils, carbon steel included CRC, HRPO, etc.
To baseline prices for carbon steel, MetalMiner used receipt-level data provided by the supplier to create an average price by SKU by quarter, allowing for price comparison from the bid process against the historical timeline.
In markets with rising costs, organizations can reduce their risk in three ways: placing more spend under contracts with suppliers holding firm the value-added processes (included freight); placing forward buys and hedging.
So, how did the study work?
MetalMiner developed a project timeline and used relevant tools, including MetalMiner’s Benchmark service and metal price forecasting service, in addition to Keelvar, which served as the bid platform.
Using Keelvar, organizations are able to do a number of things. For one, there is the ability to run multiple scenarios for each category with multi-supplier award scenarios. In addition, it allows buying organizations to leverage benchmark prices to inform target rates automatically, not to mention identify errors and wrong quotes comparatively (and thus work with suppliers to readjust pricing) — who doesn’t want that?
In short, bid optimization allows for the receipt of fast and efficient feedback and the ability to manage complex bids.
With the aforementioned background information in mind, what about results? At the end of the day, as mentioned at the start of this post, cost is often everything in the automotive world.
That means results are everything.
So, the bottom lines for this particular study:
$2 million in identified savings
$1.5 million in implemented savings
69% supplier rationalization for carbon steel
At the end of the day, sourcing optimization does a lot of things, including streamlining the contract awarding process, reducing complexity and quickly rationalizing a buying organization’s supply base.
Over the past half-year or so, it seems as though the cannabis industry is putting out a new press release every other day. And due to relatively recent state-by-state legalization, cannabis’ economic boom and the growth of its supply chain seems legit enough to spawn this spate of news.
In fact, just before beginning to write this article, I received another release on the latest industry growth numbers. And news just broke that the county in which MetalMiner HQ is based may get legal marijuana on an advisory referendum next March. Salad days for the green goddess!
Why go into all of this? Cannabis may have a lot to learn from the industrial metals sector when it comes to commodity price volatility and risk.
Cannabis (vs. Other Commodity) Price Volatility
In their recent report shared with our sister site Spend Matters, Cannabis Benchmarks (in some ways the MetalMiner Benchmark for the green sector), we can see how volatile cannabis prices are compared with other agro commodities:
Courtesy of Cannabis Benchmarks
Not surprisingly, the report states that “market price volatility can be troublesome for all the participants in the value chain.” That is precisely why most supply chain players should begin thinking strategically about managing supply — and not just price — risk (more on that in the next section).
Also not surprisingly, while traditional supply and demand factors such as weather drive many agricultural markets, “significant price jumps in regional cannabis markets appear to still be driven largely by regulatory decisions,” which we’ve reported on in detail. With cannabis remaining illegal under federal law, this is a trend unlikely to change in the short term, according to the report.
The paper goes on to outline the basics of hedging for participants in the cannabis supply chain — including the 101 on spot versus forward buying and contracts, OTC markets and swaps — with some examples to lay out what’s possible for the buyers and sellers within the nascent market.
Managing commodity price volatility and risk requires beginning to think about it strategically. Lisa Reisman, executive editor of Spend Matters’ sister site MetalMiner, knows a thing or two about that.
3 Reasons for a Commodity Management Strategy
Here’s more on how to begin framing the need for hedging strategies from Reisman (read the full article for more detail and examples):
Cost
The notion of supply chain transparency. Knowing how each entity within the supply chain prices its products and services only helps the buying organization better understand total cost of ownership (TCO).
Margin risk. By leaving the burden of extending quote validity periods or holding current pricing for longer periods of time to suppliers, the buying organization cedes control of its own ability to manage margins.
Ultimately, the cannabis industry is such a nascent frontier that now is the time for participants can begin hashing out their own agreements, using benchmark indexes, specifications and the basics of hedging, according to the Cannabis Benchmark report.
“In other commodity markets, such contract standardization has been created by participant pools, cooperatives, federal entities, and international organizations,” the report states. “Given the projected volume of transactions and currently planned centralization of distribution, the first actively traded hedging markets for cannabis could conceivably occur in California within a year.”
“It is contingent upon the industry to come together and create the framework and standards for this potential to be realized.”
Read the original article over on Spend Matters here. Need more specific guidance around commodity price risk management strategy? Contact us!
