I’m allergic to sesame seeds, so when I order a burger in a restaurant, I’m always in the hunt for a good bun substitute. So I thought it might be interesting to take a look at the current state of product substitutions in various metals markets. About a year ago, when nickel was trading at over $50,000/ton, it was almost a no-brainer to consider moving to other grades of stainless, as one example. What with the price of 304 stainless moving from the mid $6000/ton range to $5000/ton today, substitution to 200 series alloys looks a little less interesting, according to this article in Metal Center News. Read more
Articles in Category: Sourcing Strategies
Several weeks ago, a gentleman that we know (no, this is not an Eliot Spitzer story), mentioned to us that he was looking to re-source a number of different assemblies that he currently has in China, hopefully to Mexico. The assemblies are fabricated parts, quite heavy by weight, powder coated with some welds. It’s a classic mid-market assembly….relatively low volume (less than 10,000 assemblies annually), high individual dollar value but low aggregate value (a couple of hundred thousand dollars). The gentleman, leading the effort at the company, shared his frustration over not identifying a single source in Mexico that was remotely competitive. How uncompetitive were the Mexican sources? Nearly double the delivered costs from China! Read more
There is an interesting debate going on in the aluminum world that is quite probably being mirrored across other metals categories, namely – which way will the price for semi finished metals go the balance of this year? Aluminum semis prices are driven largely by the ingot price but also by the premium mills can charge for the particular product ” plate, bar, flat rolled, sections, foil, etc.
First, the ingot price. Read more
Nothing seems to rattle the tail of a manufacturing organization quite like being asked to participate in a reverse auction. But it is our contention that reverse auctions within the manufacturing sector are way down according to a comment in this article which appeared over on Spend Matters a little while ago. There are several comments in the post worth reading. But I think in context of metals raw materials, semi-finished materials and possibly further worked products containing metals, auctions are down and possibly out but not necessarily for the reasons you might suspect. Read more
I am reminded every day how sourcing strategies in today’s red hot metals markets don’t really resemble the strategies of just a couple of years ago. Today, we learned of a company whose China supplier needed to execute a contract cancellation clause because it couldn’t purchase its raw materials at a price to supply profitably. It’s no surprise as everyone can attest. In addition to rising costs for non-ferrous and ferrous metals, many of the metals needed to make other metals such as cobalt, beryllium, tin, titanium and molybdenum are also in short supply.
So besides signing long term agreements, many western firms use forward contracts, options, swaps etc. But this is not a practice that appears “typical” in most Chinese operations. The notion of Risk Management has yet to hit many global suppliers. Luckily the buying organization, whose contract had been canceled, already developed several alternatives and the impact of the cancelled contract will likely be minimal.
Forward contracts, options, swaps etc are the stuff made of traders but they are also the “new tools” of buyers and suppliers around the world. Check out this post from affiliate blog Spend Matters. New steel futures contracts will create more opportunities for steel buyers. Watch this space for information on NYMEX’s new hot rolled steel futures market to open later this year.
But I digress. I wasn’t going to write about metals futures contracts.
Even though we still predict some metals prices to drop later this year, I can’t help but wonder how purchasing organizations have modified their negotiation strategies. Or, in some cases, how they may not. According to another post on Spend Matters, “historically, the standard approach to reducing commodity price volatility in the supply tiers was to hammer and threaten individual suppliers in the hopes of avoiding price increases. This often involved threatening the use of “reverse auctions” when market conditions change. Other options included purchasing on the spot market whenever conditions looked unfavorable for on-contract spend and relying on trading companies to individually quote the best possible piece-part price on items. Perhaps the last ditch option was to pass along price increases to customers by increasing the amount you charged for products.”
So what do you do if your supplier cancels a contract because of rising raw material costs? If you re-negotiate with the incumbent supplier but agree upon a higher price – because alternatives may be too difficult to implement – are you perceived ‘as caving in’ to the supplier? In the case of a supply relationship a buying organization hopes to develop for the long term, how would this be perceived in terms of future negotiations? The whole notion of game theory changes when markets shift from buyer to supplier. Buyer sourcing tactics change too. But one thing is for sure, when overseas suppliers start canceling export contracts, a heavy hammer will do no good.
What a difference a day makes, or so the song goes. In this case it has been a couple of months since our last Cobalt post on January 16. At that time, Cobalt had reached $40/lb. and was widely tipped to top $50/lb during the year ahead. Here we are just three months into the year and Cobalt is already at $52-53/lb in Far East sales. But in that article, we also called out the prospect that prices would ease as the year unfolded and we thought now would be a good time to see if there are any early signs of an end to the bull run.
You will recall prices were being driven by both a tightness of supply following the Democratic Republic of Congo’s moratorium on exports and unprecedented demand from aerospace, power generation and rechargeable batteries for hybrid cars, cell phones, I-pods and laptops. In theory the fundamentals of demand have not changed greatly although temporarily the market does appear a little quieter and the shortage of supply is still much the same. Read more
You don’t need to finish the rest of the article to know that we are going to say it can be done. But if you are interested in how, well, now you might have to spend a minute here. I thought it would be fun to share with you a few of the ideas I have heard companies plan/discuss these past few weeks and months to achieve some cost avoidance, given so many rising metals markets. (Some of these are quite creative, I might add)
One idea that a company is noodling with involves implementing a rebate scheme for its suppliers. This works well if there is disparate spend across many companies which adds up to a lot of dollars (read multi-millions) and the supply base is fragmented, such as machine tool shops. It requires a great degree of coordination (and effective negotiation) but if the metals involved are somewhat standard with not a lot of variation, it can be done. The other benefit of a rebate scheme is that it is easy to track the benefit (i.e. a check with the rebate amount) whereas other initiatives often become cumbersome because of the difficulty in establishing an effective baseline. In short though, this option may be a non-starter for an awful lot of firms. Read more
Though Hamlet found himself in extremely dire circumstances, manufacturers throughout the world have faced a similar question, to raise prices or not? Certainly a few years ago, the answer to that question, in the automotive industry, was a resounding “no”. In other words, an OEM would never accept a price increase from his supplier, even if the supplier documented the cost increases from its suppliers. That began to change when steel surcharges really bit into supplier margins (and perhaps explains why so many automotive suppliers are no longer here today). We have personally seen many companies (both large and small) successfully implement price increases in rising commodity markets.
Reuters hosted a manufacturing summit in Chicago at the end of February. The summit featured the CEOs of many top manufacturing firms. They each spoke on various topics. We were most intrigued by the comments made about raw materials. In this audio file, Timken CEO Jim Griffith talks about how they finally did pass down cost increases to their automotive customers in the neighborhood of 10-20%. Griffith continued by saying that they live on both sides of the same coin, their company is profitable because of rising steel prices. But, they have not been getting adequate pricing for their products from automotive customers. If they don’t, “it’s the end of the road.” Read more
The LME’s first steel contract made its “soft launch” this past Monday ahead of full service being introduced in April of this year. The contract allows for steel billets in 65 ton lots to be traded 6 months forward for delivery to either the Marmara region in Turkey or Dubai, UAE for the Mediterranean contract or to Johor Malaysia or Inchon South Korea for the Asian contract.
As expected, volumes were low and probably orchestrated by some of the larger players to start the trading. The LME, however, was satisfied with the first day’s $1m turnover. It is hoped the contracts will pick up quicker than a plastics contract launched three years ago which failed to attract much interest, or for the Dubai Gold & Commodities Exchange (DGCX) steel contract launched late last year and now averaging 75 contracts or 750 tons a day. The DGCX contract is for reinforcing bar (rebar) used in the construction industry; consequently it is very applicable to the local Dubai market which is booming. The LME contract on the other hand is for steel billets, one step back up the food chain from rebar (billets are considered the starter material for making not just rebar but wire rod and merchant bars too). Consequently, the LME is hoping that consumers of a wide range of steel long products will take up the contract to hedge their forward supply risks.
Certainly there is much to aim for; a total 636 million tons of billet were produced in 2006, more than 10 times the total 61.3 million tons of non-ferrous metals such as gold and aluminum in the same year. The steel billet market was valued at $310 billion in 2006, about 35% more than the $230 billion value for all of the LME’s non-ferrous metals products. How much and how quickly the LME’s contract is taken up remains to be seen. There has been considerable skepticism from the larger producers. They see a futures contract as increasing the probability of volatility and running counter to their own efforts to bring stability to the market by consolidation and production management. The main interest in the contract has come from the banks and from small to medium size suppliers and manufacturers. The banks see it as a potential route to hedge risk on loans to the industry and (here comes the major producers concern) as a vehicle to tap into another lucrative volatile commodity market. Interestingly none of the western steel producers have applied for their billets to be approved as a deliverable brand. All the accepted brands are East European (principally Russian and Ukrainian), Turkish, or Greek with one Asian exception from Malaysia.
Of greater interest to US manufacturers is the eventual launch later this year of the much delayed Hot Rolled Steel Coil market by New York’s NYMEX exchange. This contract will allow consumers of steel sheet and plate to finally access a forward market. It will also allow buyers to arrange their physical purchase contracts accordingly, essentially locking in current pricing over a much longer term than producers are currently willing to offer. This is an issue for the steel goods market that we have seen time and again – the inability to create a national benchmark for steel pricing and to hedge the risk on the underlying metal component of semi finished and finished goods.
So it may have been a soft start but it’s likely to ring in some fundamental changes to the way steel is priced in the years ahead. We welcome the new contract and feel this will bring significant benefits especially if the LME’s lead encourages NYMEX to get their act together on the HR coil contract over the coming months.
- Sourcing Strategies
Yesterday, we spent some time talking about how middle market manufacturers can create natural hedging opportunities by paying close attention to their scrap management programs. Today, we offer some additional tidbits.
First, security – some firms treat their scrap in such a cavalier fashion as much could be lost in theft each year as is sold for net revenue. Scrap is a valuable commodity and should be held in secure conditions. More important still every pound should be tracked and accounted for, just as inbound goods and raw materials are tracked and accounted for.
Second, where more than one grade of scrap is generated each grade should be segregated and stored in clean conditions. Where multiple metals are concerned this becomes even more critical, as some metals are considered a contaminant to others in the scrap recycling process. Mixed grades and contaminated scrap have a significantly lower value than clean and demonstrable traceable scrap.
Third, maximise the sales value. Don’t rely on a long standing relationship with Joe Metal Merchant down the road. At least benchmark the prices. In virtually any geographic location there are multiple scrap dealers willing to bid for your product. It is the simplest of matters to have them bid for every lot once a month or however you choose to sell. It could be quarterly at a fixed discount from the average futures market quotation. In fact using an average (as with purchasing) helps to even out the peaks and troughs. In an ideal world you would create a mirror of the price fixing from your purchase arrangements to truly achieve a matching hedge to rises or falls in your purchase costs. For an industry that operates so heavily on a cash basis, having an auditable and established price fixing process such as an auction helps to safeguard the business against the possibility of fraud (you won’t be surprised to hear scrap is one of the most notorious sources of loss to metal processing companies).
Last, track Comex or the LME. Stay informed of market movements and create incentives for your staff to track, analyze and maximize the revenue earning opportunities of your scrap management programs. It is an often overlooked source of price stability and revenue. And given increased cost pressures, who wouldn’t implement such a program