Author Archives: Raul de Frutos

The value of the dollar continues to drop, now reaching its lowest weekly level against the Euro since February. Indices that compare the dollar against a basket of major currencies show the same trend.

As long as the Federal Reserve keeps printing money to make borrowing rates decline, the dollar will remain weak. Some currency analysts point out that the Fed is not likely to stop doing so until the second quarter of next year –  so we are still a ways off.

What is the effect of US dollar depreciation on metal prices?

Metal prices typically follow an inverse relationship with the value of the dollar. When the dollar appreciates against other major currencies, metal prices tend to drop. When the value of the dollar weakens, metal prices generally go up.

FREE Download: The Monthly MMI® Report – price trends for 10 metal markets.

Copper_Dollar Relationship

Source: LME & St. Louis Federal Reserve Bank of Chicago & MetalMiner Analysis

The chart above shows how this inverse relationship works. The green line represents the Copper 3M LME price (weekly), while the blue line is the inverse of the dollar index (and for you stats folks out there – we used relative scaling to better see how closely they move). In the case of copper, there is a correlation of 86%, which means that copper prices strongly correlate with the value of the dollar.

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As we all know, cheap energy has played and will continue to play an important role in economic growth. US natural gas prices have fallen as shale gas deliveries started to enter the market. Prior to that, the US would have become a major importer of liquefied natural gas (LNG). However, the recent surge in US shale gas production has turned the tables, and the US may become a major LNG exporter.

MetalMiner, in conjunction with the Institute of Supply Management (ISM), is conducting a snap survey to better understand the potential impact of American LNG exports on energy prices and the manufacturing sector overall. The survey (developed into a larger study) seeks to better quantify the importance of lower natural gas prices on sourcing activities, as well as capex and a US manufacturing renaissance in broader terms.

Got two minutes to spare? Please take this survey!

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raul de frutos headshotEd. note: We thought we’d point the limelight at one of MetalMiner’s newest team members and let him offer his takeaways from Commodity/PROcurement EDGE last week.

This conference was one of the best I have ever attended with very in-depth and relevant information – and that has nothing to do with the fact that I work for MetalMiner and, no, Lisa Reisman is not pointing any kind of weapon at me as I write this!

I believe the audience was key to making this conference a success. During other conferences I’ve attended, I didn’t see that much interaction because of people not being engaged enough, or being too afraid of asking silly questions. However, I was surprised by the number of questions that came up during my non-ferrous metal price forecasting presentation. I heard such great questions that some of them made me stop for a second until I could come up with the absolute appropriate answers. I feel like not only the attendees, but also the speakers, could find key takeaways during each session.

Our goal was not to use this conference as a means to sell any particular product and I think that was critical in making attendees feel comfortable to participate in the discussions. Also, I believe speakers went out on a limb by actually giving their forecast of future prices and trends, which, as we know, is often hard to tease out in a meaningful way.

In regards to metal price forecasts, we tried to give our personal opinion (backed by data, research and experience) of what we see likely to happen with ferrous and non-ferrous metal prices in the long-term. We also exposed our new objective, quantitative approach to short-term aluminum, copper and nickel price forecasting, acknowledging the difficulties that we see in buyers getting the right price.

I hope everyone had as great a time networking as I did. I felt like everyone was very approachable and willing to have a good conversation – I think the timely breaks helped to enhance that.

Finally, the food was great as always. The paella made miss my country. On the other hand, those delicious smoked salmon bagels made me question whether I should keep having my cereals for breakfast.

Raul de Frutos is MetalMiner’s lead forecasting analyst. Read more about MetalMiner’s price forecasting capability.

*If you attended Commodity/PROcurement EDGE, please leave your comments on the event below!

steel-ball-in-hand-L1

Using Forecasting Tools to Buy Aluminum

Understanding whether aluminum price movements appear as a short-term shift or a long-term trend remains a big challenge for most manufacturers and sourcing organizations.

Market intelligence helps provide necessary guidance.

Taking advantage of short-term price movements remains a challenge because it requires a certain degree of flexibility. The more flexible an organization is, the more options it will have to implement strategies to better manage long-term and short-term commodity price movements – and that certainly includes aluminum prices.

Want more info about MetalMiner’s aluminum price forecasting capability?

Keep reading for a case study on using short-term forecasts to time spot purchases to lower overall category costs:

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We typically see companies deploy a variety of procurement strategies to manage their aluminum purchases. Generally, a buying organization evolves its strategy coincidentally with the dollar amount of the category. As US manufacturers grow their revenues, they tend to add new capabilities to their procurement strategies, such as price forecasting.

Where Does Your Company Fit In?

Below, we place manufacturers in three different categories, representing their buying sophistication as aluminum spend increases:

chart of company metal spend vs capability

Category 1 Manufacturer (Small)

Purchases tend more toward a spot-buying strategy (e.g. monthly or as needed). The company might place an occasional forward buy based on a market indication that prices might increase. The company may not use long-term contracts to hold fixed value-add processing/conversion costs.

How are Categories 2 and 3 different?

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hands signing contract on picnic table

What do I need to know about purchasing aluminum from suppliers?

How Do I Select Suppliers and Determine Buying Strategies?

As with any sourcing strategy, in the aluminum metal market, the optimal award decision comes as a result of ongoing analysis of quality, quantity required, cost, delivery, service and continuity of supply.

The ongoing practice of analyzing demand and forecasting future aluminum purchases remains paramount. The power of a “locked order” on the customer side gives buying organizations leverage over the longer term on the supplier side. Furthermore, with demand in hand, buying organizations have the ability to weigh a wider variety of sourcing strategies to achieve cost savings.

Once the forecasted quantities become known, the buying organization can create cost estimates. This spend analysis, so to speak, creates a complete and documented understanding of the organization’s past and future aluminum purchases. Since the price of aluminum varies from period to period, making use of a long-term forecast provides context and expectations as to the aluminum price and therefore provides the buying organization a better budget from which to plan future aluminum purchases.

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budget sheet with pen

This is the second article of a 5-part series on How to Embed Forecasting Capability into Aluminum Sourcing Practices. Read Part 1, on assessing your price risk and exposure, here.

How to Identify Cost Drivers

When placing metal purchase orders, manufacturers need to have a solid understanding of the cost breakdown of their purchases. In this manner, they can understand where increases/decreases in their raw materials purchases come from. The graphic below illustrates an example of cost breakdown for aluminum purchases:

graphic of LME aluminum cost drivers

So let’s break out each aluminum cost driver, shall we? Then we’ll get to the best practices.

Learn more about MetalMiner’s aluminum price forecasting offerings.

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The first article of a 5-part series on How to Embed Forecasting Capability into Aluminum Sourcing Practices.

This initial step requires the aluminum buyer to fairly and accurately assess the company’s degree of exposure to aluminum price risk as well as determine the risk tolerance of the organization before implementing any forecasting capability.

Estimating the Degree of Aluminum Risk Exposure

A company has several checklist items to examine to ascertain price risk:

  1. How many dollars does the company spend on both aluminum semi-finished materials and/or parts that contain aluminum?
  2. How does the end-to-end price equation work with key customers? For example, pass-through pricing reduces risk, but fixed pricing with customers does not. How readily can the company pass through price increases?
  3. What is the company’s policy regarding hedging? Is the company obligated to hedge under any circumstances?
  4. How does the company manage its purchase contracts? For example, does it buy on long-term contracts only? Does it buy on the spot market only?

Learn more about MetalMiner’s aluminum price forecasting offerings.

The next important question to ask involves the company’s sensitivity to aluminum price volatility.

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Have you ever gone to Google to look for opinions of where prices might go for a particular material, component, or assembly to better time a purchase order? Have you ever placed a forward buy because you thought prices might increase in the next weeks or months – but then after executing a forward buy, prices went the opposite direction?

It’s because of those types of risks that manufacturing companies typically seek two types of price forecasts: long-term forecasts and short-term forecasts. Long-term forecasts tend to help companies during the annual budgeting process, or when negotiating longer-term sales contracts with key customers. Short-term forecasts help companies with the tactical buying needed to meet actual customer demand.

What are the key differences between the two when it comes to creating accurate metal price forecasts?

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