How can procurement respond to crazy commodity markets?

Commodity prices have been going crazy recently.  After huge increases this year to date, last week saw some of the biggest short term declines ever in commodities such as oil and silver.  What happens next? Who knows? As our guest writer Andrew F Smith commented here, while procurement people need to understand hedging and commodity strategies, if things don’t’ work out, “the journey from hero to zero can be rapid.”

Jason Busch at Spend Matters US has written a whole series of posts on commodity management tips and tactics recently which I would commend to you if you’re interested in that area.  (Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, and Part 7).

And this week Jason discussed the recent volatility.

Consider how, according to the WSJ, Oil fell 8.6% last Thursday to "$99.80 a barrel, the lowest closing price since mid-March." And "Copper, another closely watched economic barometer, shed 3% for the second day...[additionally] the latest swings came amid a weeklong nose dive in the silver market that accelerated Thursday with an 8% drop. As recently as Friday, silver was up 161% in a year, but it has lost a quarter of its value in four days." Or take major agricultural commodity performance at the end of last week: "cotton fell 4.5% and sugar fell 2.3% on Thursday, and are now down 23% and 41%, respectively, from their 2011 peaks." And remember those peaks occurred in the March timeframe, in most cases. Not long ago!”

So, while we can’t and shouldn’t claim as procurement professionals that we can forecast the future – we would be making billions trading in the markets if we could do that – procurement organisations and people need to, as Jason says;

be able to explain to their stakeholders the rationale behind price movements in order to more accurately forecast where the markets they care about are likely to go. We might not be able to fully explain the unexplainable, but creating a point of view by digging into the fundamental drivers of commodity prices (e.g., supply, demand, macro-economic trending, speculation vs. end consumption, stockholding vs. production) is more critical than ever”.

And if you’re involved at all in the Metals markets, don’t forget the resources available from MetalMiner, our sister site.

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