Hitting hard - how metal price volatility is impacting manufacturers

 
 
 

Metals are used in a wide variety of applications in our day to day lives. An ongoing challenge for a number of companies along the supply chain including producers and distributors is managing price fluctuations. Raw material prices are increasingly volatile since the latest financial crisis and constantly changing due to a number of factors. 

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The full effect of volatility is difficult to measure but is generally seen as negative because it brings with it uncertainty about future price levels. When producers and consumers do not have a good idea of what future prices may be, planning for the future suffers and they are less likely to invest in new production or applications for a metal.

Iron-ore prices have soared this year, a resurgence driven by falling supplies that has led to challenging times once again for steel mills that use the material. With price movements over the last three years of between $40 and $120 a tonne, analysts were tipping the price to go up as far as the boom times in early 2014.

As steel’s main ingredient, iron ore is one of the world’s most traded commodities and can influence prices for materials used in everything from cars to skyscrapers. The global steel industry uses roughly 2 billion metric tonnes of iron ore, along with metallurgical coal and recycled steel, to make 1.7 billion tons of crude steel each year, according to industry.

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Aluminium has seen price movements over the last 10 years from $1,300 to $2,700 per metric tonne. While  Copper has moved from $4,500 to $7,200 per metric tonne over the last 5 years.

Companies such as manufacturers are significantly affected by commodity price volatility. Rising prices means being torn between reduced margin and passing the cost on to customers (which often isn’t possible). The current most common ways of dealing with price volatility among manufacturers are:

  • Doing nothing: Allowing cash flows and P&Ls to fluctuate in tandem with commodity prices - particularly common among SMEs

  • Fixed-price supply contracts: They give certainty, but come at high mark-ups and remove not only downside risk but also the opportunity to benefit from price decreases

  • Hedging: Futures, Options, Forwards and Swaps - for those who are large enough to afford them

  • Balance Sheet: Setting aside cash to absorb the cost fluctuations internally - for those who can spare the cash.

If you are looking at a new way to manage your exposure to price volatility then take a look at ChAI. ChAI combines vast commodity markets expertise with deep Artificial Intelligence (AI) capabilities and superior access to both established and alternative data sources (including satellite & maritime) to make predictions of commodity prices over time horizons of one month to one year. ChAI’s missions is to mitigate the negative cash flow impacts of price risk for buyers and sellers of commodities.

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