Forecasting Commodity Markets: The Importance of Leading Indicators

One thing that procurement organizations tend to fail to ask is: "Why?" We gather, we analyze, we structure, we respond, we negotiate and we manage -- but we don't ask anything that might be extraneous or otherwise non-core. Simply put, we don't ask: "Why?" But asking "why" can lead to fundamental observations and breakthroughs that can help us track everything from commodity market trends to potential supplier behaviors. "Why" forces us to dig below the surface. And it's at the core of what MetalMiner, Spend Matters' sister publication, recently asked when it suggested 5 economic indicators impacting metals markets. The author of the column, Lisa Reisman (my wife and partner in supply chain crime), posits that something as routine as reading the news headlines and thinking through what they impact can help us analyze where markets might be headed.

Lisa suggests that in forecasting metals prices, we should filter out the noise of things like isolating weekly raw steel production as a key indicator, because if you ask why the numbers go up or down, it has little to do with real demand or economic output -- at least in the short term. For example, in one week where utilization increased slightly, Lisa suggests that "capacity has been heavily orchestrated by the mills to match demand and not 'too much capacity coming on too fast.'" Other areas Lisa considers as leading indicators -- but that require further analysis below the surface, including looking at how indicators relate to each other -- include inflation, import / export prices and PPI. Increasingly, it's become important to ask "why" in the context of multiple leading indicators -- in some cases a dozen or more depending on the commodity. Lisa questions: "Why do we draw on each of these measures, you may ask? Because some of these indicators begin to explain the unexplainable." Further, "As commodity volatility has become a standard operating condition for all metal buying organizations, our forecasting tools and resources need to become more robust. The interplay of variables ... along with dozens of others should become a part of every metal buying organization’s commodity dashboard."

Are you ready to ask "why" in the context of all of the leading indicators for the commodities in which you manage -- or your organization manages -- not to mention examining the interplay between them? If not, you might as well wait for your next spend visibility refresh to get a commodity view from a rear-view window -- versus looking out at the road and making educated bets on the curves and hills that lie ahead.

Jason Busch

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