Ariba's Supply Watch Road Show — Part One: Metals

Last week, I spent the better part of Thursday morning in Chicago's trendy W Hotel for Ariba's Supply Watch road show. The quality and substance of the gritty material that Ariba's John Starr, Mike Petro and Justin Falgione presented offered an ironic contrast to the hip and Silicon Valley-esque environment of Starwood's facility. (BTW: all three of these guys are completely out of place in a software company -- in the best possible of ways. This speaks to why the old FMKT crew left at Ariba is so different from the SAPs and Oracles of the world when it comes to sourcing). But back to the subject at hand -- the Road Show itself.

This week, I plan to share some of the category perspectives and trends I gained from the event. I'll stay away from including very much of my own analysis in these posts, as the category experts are far deeper in the specific trends than I am. Today, I'll start out with a number of metals trends and insights offered by Mike Petro. Mike, who serves as Ariba's lead category expert in metals and related areas, talked about trends in both ferrous and non-ferrous metals pricing. In no particular order, here are some of the comments I found most insightful.

First, steel. According to Mike, steel remains high from a historical perspective due to the fact that China accounts for 30% of global steel production and consumption. On a related note, steel scrap prices (often a leading indicator of steel prices) have surprised everyone with a 60% spike in prices since December. And one "Asian" steelmaker is so bent on identifying sources of scrap that they're even looking to Florida as a source of scrap supply. Interestingly enough, China has shifted from a "a 35M metric ton importer in 2003 to a 31M ton exporter in 2006" and "India will increase steel production by 320% by 2010" to over 150 metric tons. So who is the world's largest importer of steel today? If you guessed the US --surprisingly -- you'd be right. The US is, in fact, a larger importer of steel than the EU25 combined. This is due in part to intentionally low capacity utilization at US mills (to keep supply constrained and prices high). Sorry to ramble on with all these data points, but I find the unfiltered numbers and facts fascinating and worth sharing.

From a non-ferrous pricing perspective, while copper is no longer continuously rising, Nickel has shot through the metal roof. A truckload of nickel -- about 40,000 pounds -- is now worth nearly $1,000,000. That's over $20 per pound (a number that stood right around $3 per pound in 2002). Volatility and price rises in Nickel and other non-ferrous metals are not just due to physical demand, however.

Much of it can be attributed to financial institutions getting into the trading game for short-term profit. In my free market view, this third party involvement is good over the longer term -- it should serve to enable less volatility and greater liquidity and price transparency. But short term, it will hurt volatility, as speculators corner specific markets before enough traders come in to lessen arbitrage and other related opportunities.

Mike also commented on the great profits that mining and base metals companies are realizing as a result of all of this price escalation -- and the surplus cash they have to go out and buy competitors. He mentioned that BHP and Rio Tinto are mulling a $40 billion takeover of Alcoa as one example. As a last metals note of the day, he suggested that wild cards for metals volatility and price rises include continued supply and demand requirements in China, regional export and import controls, labor disputes, and a potential change in management at the LME (London Metals Exchange).

Jason Busch

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