Spot Buying and Volatility: Industrial Sourcing Strategies

Over on Spend Matters Network site MetalMiner, we recently published a report (available for free download) titled Translating Price Trends Into Metal Sourcing Strategies for 2013. In it, we look closely at pricing trends from 2012 across a variety of metals categories and industrial applications (e.g., automotive, construction, etc.) and provide our pricing and strategy outlook for 2013. One of the questions we tackle in the analysis involves looking at what intra-month volatility suggests from a spot buying perspective.

Here’s what we have to say on the subject:

Companies that buy finished products or commodities containing significant amounts of stainless, copper or aluminum and/or buy semi-finished forms of any of those metals saw significant commodity volatility (see chart in the paper, showing monthly volatility), rendering ineffective any type of buying strategy involving regular spot purchases. (Spot purchases include regular weekly, monthly or quarterly purchases.)

When a company deploys a sourcing strategy of “meeting the market” – in other words: when prices rise, the company pays more; when prices decline, the company pays less – it can work. But if maintaining margins, locking margins or mitigating price risk forms the basis of the sourcing strategy, only companies that took long positions on these metals (stainless, copper and aluminum) mitigated 2012 price risk. The month-to-month volatility suggests to us that at a minimum, companies ought to consider hedging “known demand” (e.g. booked demand) to manage margins more effectively.

Download the full report here: Translating Price Trends Into Metal Sourcing Strategies for 2013.

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