A Manufacturing and Procurement Outlook: Forecasts and Predictions for 2014

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This post is the last in a series featuring an interview with MetalMiner’s Lisa Reisman, For the first installment (covering construction and automotive trends) and the second (covering aluminum, copper, President Obama, China, and more) click the previous links.

Jason (Spend Matters): Where is all of this headed next year?

Lisa (MetalMiner): I’ve actually been thinking about three specific predictions for 2014, which may seem like outliers or even contrarian. But here goes.

First, I believe we’ll be in recession next year. It will not be a big dip, but it will last four quarters. We will see continued downward price pressure on commodities leading up to it and companies should be focusing on commodity risk management to make sure they’re taking advantage of falling prices while not getting stuck with inventory as order books drop.

The second prediction is that we must change how we look at commodity pricing and volatility. In recent years – really since 2003 – from a strategic sourcing and commodity risk management perspective, we’ve all been operating under the premise that markets have been extremely volatile. This dictates specific strategies—hold that thought for a minute.

As I look at it, volatility implies to me rapid price movements in both directions. I think we’re now about to see, with the exception of certain markets (e.g., steel), a new type of trending. Specifically, we’ll see prices eroding further and falling on a consistent basis until they level off, and I don’t see anything stopping this until market demand returns. In other words, look for less “up and down” every month and significantly more “down” even if the drops are less marked. Declines might be very, very gradual (or not), but the up/down frequency won’t be the same.

How does this change buying strategies? If you were buying on a price index to manage the price volatility or hedging to try to buy on the dips in the past, you were executing a sound strategy in the market conditions at the time. This is the best you can do in volatile markets, especially markets with overall upward price pressure. But now you have a situation where things are generally down trending. This changes the strategies.

If my predictions are right, you won’t necessarily want to buy on an index and you don’t necessarily want to hedge. The spot market can be your friend in a falling market. Looking into 2014, I would do less forward buying inside a company, unless I was doing true commodity risk management based on preserving margins based on actual forecasts.

Moreover, this is an opportunity for companies that have lost out against the market to pick up. Generally speaking, with steel as the exception (as it follows a somewhat bizarre cyclical trend), instead of timing buys based on volatile up/down, we believe the downward price certainty dictates an approach about riding the market down.

The final prediction I’ll leave you with its that the value of a crystal ball will only continue to grow – although one founded on objective inputs and analysis rather than on subjective reasoning. Specifically, when it comes to tactics, I think the value of true forecasting will only grow – whether it’s for commodity markets, inventory, demand, currency, or specific service level requirements and expectations for end customers (or internal customers to procurement).

When it comes to commodity markets, one of the benefits of forecasting is that it will capture any volatility that does exist and allow companies to take advantage of it (even if volatility levels decline overall). More important, the value of forecasting is that it can serve as back-up to subjective predictions to forward commodity risk management strategies.

One of the issues with most forecasts in general is that they’re more subjective than anything else. This goes for internal forecasts and those from economic forecasting houses small and large – especially long-term forecasts. What is more valuable (in most cases) are those objective forecasts, which of course requires a more quantitatively and analytically inclined procurement strategy (and team) than in the past.

Spend Matters would like to thank MetalMiner’s co-founder, Lisa Reisman, for joining us for this series and for getting us home as quickly as possible from our kids’ summer camp adventure. Click here for Part 1 and Part 2 of this series.

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