Earlier last week, my wife and fellow blogger Lisa, got a call from a client who was trying to decide whether or not to hedge certain categories of metals spend. I'm sure what was on this gentleman's mind is also a front and center issue for thousands of others. Regardless of whether or not you have the option of forward buying -- or hedging -- commodities such as oil and metals, it pays to better understanding how these options can help to leverage the current price trough (look for more on these options in a later post). But perhaps most important, before making any long-term decision, it's critical to develop a better grasp of the underlying commodity markets to know if producers are close to marginal cost and whether there's still further price compression to come.
For example, Lisa suggested to me that aluminum was very near the marginal cost of production, yet copper was not. Hence, if you have the chance to take advantage of forward contracts or locking in the price of aluminum as an underlying contract component, it might be the right time. Copper, on the other hand, still might have room to fall. Across other categories, it's important to develop a similar analysis, albeit one that goes into far greater detail than the above. By example, it's essential to break out all of the price elements that go into the production of a material input as well as to understand overall demand and supply drivers in the market. If you don't want to do it yourself, reach out to a research firm like Denali Intelligence or The Smart Cube to do it for you. In the case of metals, I'll also give a shameless plug for Aptium Global, which is also busy doing these types of analyses now as well. But regardless of whether you do this internally or rely on a third party perspective, do it quickly. And that’s because the one thing that we can all pretty much bet on is that the commodity markets will not remain where they are given the high volatility of the past 18 months.
- Jason Busch