Sourcing Metals (and Other Commodities) as The Euro Craters (Part 2)

Please click here for the first post in this series.

Continuing on in sharing insights from a MetalMiner series on sourcing commodities in the context of a falling (and/or highly volatile) euro, Lisa suggests that US buying organizations may wish to consider a range of sourcing strategies. These may include offsetting a falling euro "against the dollar with the contract in dollars." Under this approach, "the buyer should negotiate hard at the outset for a 'lower price,' as a declining euro will result in increased supplier profits over the course of the contract. In other words, the buyer should negotiate some sort of discount at the outset." An alternative approach might a contracting model factoring in a falling euro against the dollar with the contract in euros.

Under this approach, "the buying organization may opt to price the contract in euros and then 'convert' from dollars to euros just before payment is due to capture every last penny of a falling price." The third sourcing strategy MetalMiner recommends is most appropriate when volatility exists in the euro/dollar exchange and a contract is in dollars. Under this case, "a buying organization may wish to take out a hedge (though that certainly comes at a price) and in the case of fixed price sales contracts, lock in all of the risk on the sourcing side (to protect margins)." Finally, MetalMiner recommends in the case of a volatile euro/dollar exchange with a contract in euros to also consider a hedging approach on the "purchase side...depending on how the contracts appear on the sales side (e.g. USD)."

MetalMiner also explores other strategies and scenarios in this post series, including looking at how a lower-tier European supplier that sells in dollars but purchases in euros could theoretically pick up the gain in a falling euro environment -- a situation that has undoubtedly happened in recent months for European tier one and two suppliers in certain markets. If you're curious about the subject, we encourage you to follow MetalMiner closely in the coming weeks, as well as the Spend Matters series on the same topic.

- Jason Busch

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