Price Forecast Modeling — Where Your Commodities are Going? (Part 2)

In the first post in this series interviewing MetalMiner's Lisa Reisman on commodity price forecasting, we looked at why we must now take seriously a different method of forecasting metals prices (versus in the past when this was less of an issue) as well as an acknowledgement that traditional inputs or variables for these metals no longer does the job in terms of metals forecasting equation. Today, we'll continue the discussion, and we'll start with an example of a single input into a scenario forecasting model.

The excerpt below is taken from an interview with MetalMiner's Lisa Reisman: "As an example of a variable we consider in forecasting the price of different metals, we look at Chinese PMI, because China supply and demand drives so many metals markets, particularly steel and lead, for example."

As companies begin to gain access to a price modeler and forecasting tool that allows them to monitor in a dashboard styled format, the multiple variables for each metal as well as change the weightings of the variables (with a set level based on an expert forecast as a foundation), they gain the opportunity to begin to model different scenarios -- tying both their own forecast demand as well as forecast commodity pricing together. This is a huge boon when it comes to not only mitigating pricing risk through buying forward, hedging, escalation/de-escalation clauses with suppliers who are buying material on your behalf as an input cost, etc., but also developing a longer-term strategy around different metals categories. In short, if companies have scenario price modeling tools available to them, they can:

  • Manage their commodity volatility more effectively
  • Be more accurate planning and budgeting
  • Ultimately, not find themselves on the wrong side of the market

Perhaps most importantly, they won't find themselves in the position of being "big and wrong" -- the worst possible place to be in the commodity buying two-by-two. This is precisely where Ford found itself years ago when they bet big and wrong on the price of Palladium -- to the tune of over a billion dollars. With scenario price modeling tools, our plan is to reduce the risk of uncertainty. With the tools we are bringing to market, our plan is to help companies who care about metals pricing mitigate risk and make swings more manageable. If you're selling on a fixed price, this application will let you better manage your margins because you can take different strategies when the variables change. You simply can't garner that type of insight by reading a 100 page report looking at what happened last year.

MetalMiner will be covering all the base metals with our soon-to-be-released scenario price modeling tools. Right now we're looking for five beta clients and the slots are filling among practitioners, producers and service centers. If you're interested in learning more or seeing what the application looks like, drop me a line: lreisman (at) aptiumglobal (dot) com. If you're trying to manage and forecast commodity volatility in the metals markets, I think you'll find our philosophy pragmatic and flexible."

- Jason Busch

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