My colleague and business partner, Stuart Burns, who's also a co-founder of MetalMiner, recently wrote a piece on our sister site with broad applicability for all procurement organizations in the manufacturing sector: EU May Quash Platts, Other Commodity Price Benchmarkers: Good or Bad? Stuart’s reporting and observations are based on a recent article from The Economist. The article highlighted how EU regulators are moving to reduce corporate dependence on third-party price points for contracting.
As Stuart writes, “numbers such as Dated Brent and Light Louisiana Sweet in the oil industry are matched by dozens of others in the metals markets. The Economist explains that rather than hard numbers, these are often the best estimation of price-reporting agencies (PRAs), businesses that make money by gathering market information and selling it to subscribers … These are often not the standardized commodity contracts that trade transparently on busy exchanges such as Comex or the LME, exchanges that do not always cater to the many different specifications required by industry, the magazine explains.”
Further, “PRAs, of which Platts is the largest, essentially estimate what the market price is based on information fed to them by buyers, sellers and brokers in the market … For most people, most of the time, this seems to work well enough, but the point of the article is that the European Union fears such unregulated benchmarking is open to abuse and needs more oversight.”
The reason regulators are challenging price indexes is that they are subject to manipulation by traders and others with interests in the market (regulations governing commodity trading are also different than equities). As Stuart observes, “it doesn’t take a leap of faith to see traders feeding prices to the PRA at higher or lower than the true market level in order to influence a derivative or contract. Indeed, a number of traders or brokers on the wrong side of a short or long could collectively sway prices without even colluding as they respond to a collective desire for the price to rise or fall.”
Yet these price benchmarks also play a huge role outside of the commodities trading world because procurement organizations are increasingly incorporating price de-escalation and escalation clauses into contracts with suppliers based on them – among other use cases for price indexes. This is a critically important topic that is not black or white – and the decline of commodity price indexes in the EU would be a shot heard round the world to advanced procurement sourcing and contracting strategies.
Stay tuned as we investigate this story further.