Up, Down or Around — Making Sense of Commodity Price Indicators

As I mentioned in a post earlier today, I spent a good deal of time these past couple of weeks reading various papers and periodicals. And one thing I took away from these relaxing hours with hot caffeinated beverages and both news and glossy print was that commodity price indicators are all over the map. Metal prices are declining in China -- at least according to my wife -- perhaps owing to the ultimate outcome of the government buying up capacity to keep mills operational. But in the US, food prices are looking like they might once again start to climb after a rather steep downturn in 2008 and a continued but flattened slide in 2009. And oil prices, possibly the most volatile commodity that most of us track on a regular basis, have been moving all over the map these past few months. As commodity managers and procurement executives, what should we make of the situation?

I'll offer a couple of observations here. First, I think it's become more important than ever for all of us to spend more time on a weekly -- if not a daily -- basis keeping up with the general business and commodity headlines. We need to be the eyes and ears of the company at the moment when it comes to gathering data points to come up with reasonable price predictions for where the commodities we track might go and the degree of volatility we can expect along the way. What are good sources for staying current with the news? I'd honestly skip Spend Matters, Purchasing and other industry pubs and read the The Economist and The Journal or FT if you have the time. For it's these publications that don't just report what's happened (e.g., "hot rolled coil prices are up") after the fact, but provide pre-emptive knowledge and background to help you draw up your own conclusions and hypotheses based on where the market might be going.

And last, as I've recommended countless times before on Spend Matters, I'd think very seriously about building a closer relationship with the finance organization -- or the trading organization if your company has one -- to come up with the most creative and effective ways to take pre-emptive action to combat commodity volatility. Working closely with finance and/or traders, it's possible to work through the underlying issues that should drive any commodity strategy. For example, who should own commodity-pricing risk (our suppliers, our customers, our organization)? What levers do we have available to reduce risk (and what are we willing to sacrifice via margin to do so?) What exchange traded contracts do we have available to help take commodity risk off the table that either approximate or mirror what we're buying (e.g., steel futures contracts). But regardless of what you do, act fast. Because wherever this market takes us, it's pretty clear that it's going to be one bumpy commodity ride along the path to recovery.

Jason Busch

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