Supply Dynamics Insights
Industrial Metal Prices Surge:
Q&A with Supply Dynamics’ Trevor Stansbury
Andy Home's recent column “What are surging industrial metal prices telling us?” hits home with many of our original equipment manufacturer (OEM) customers. Commodity market price uncertainty and risk consistently ranks one of the top concerns of companies across industries, including aerospace, transportation, industrial manufacturing, and more. Founder and CEO of Supply Dynamics, Trevor Stansbury, discusses these market forces and ways that OEMs can reduce purchasing risk within their supply chain.
Q: In terms of surge in pricing across metals, what do you think has driven the change in the demand and supply position across-across the market?
Trevor Stansbury: When it comes to metals pricing, it's not as simple as just supply and demand. There's so much speculation and other variables that impact price that it's virtually impossible to predict where prices are going. Thus, what you do is you look at “resistance levels” and constantly monitor the factors most likely to influence them. Two key variables come to mind:
First, what are the macroeconomic forces in terms of things like GDP growth or contraction, rig counts, oil prices, and what are the trends in manufacturing? What's happening in terms of economic growth, housing starts, government stimulus, and trade policy? Those are all examples of things to watch.
And second, what is China doing?
Having said that, if you look at historical pricing trends, there’s no question that commodities are emerging from what have been historical lows. If economic recovery sticks, here in the United States and elsewhere, I think it's safe to assume that we're going to see tighter, more escalatory markets in the future.
Q: What does that mean for sourcing leaders at our OEM customers who are heavily reliant on commodity prices?
TS: That's a great question. In the great recession [2007-2012] mills and distributors were hit pretty hard. They were the first industry to feel the heat and one of the last to emerge from the recession. Understandably, gun-shy metals distributors have kept their inventories fairly low. There's not a lot of cushion should demand surge and prices continue to rise. OEM's ought to be mindful of that. What that means is you could see a more rapid than normal increase in price as buffer stocks disappear. Keep your eyes on lead-times – they’re the proverbial canary in the coal mine. Once mills hit about 70%, which is for all intent and purposes running at capacity, watch out.
If you're an OEM, my biggest advice to you is to get a handle on raw material demand across your extended value chain. Not just for the materials you need to feed your factory floors, but also material requirements for all of your outside contract manufacturers. Do they have material on long term agreements? Are they buying on the spot market? What are they paying?
If markets tighten, the data on consolidated material requirements will give you the ability to combine forces with your contract manufacturers to collaborate on the purchase of common materials. If you don't have a handle on material requirements, then you're not able to communicate an accurate forecast of demand to the mills and distributors and will never get a preferential price.
Preferential price in the marketplace is predicated on your ability to give that mill and distributor an accurate understanding of what you and your outside suppliers are going to buy over the next 6, 12, 18 months.
Everyone tends to think price is a function of volume. While that’s partially true, a bigger consideration for most mills or distributors is how accurately you can forecast demand and provide meaningful information to them about the quantities, sizes and specifications of the materials that will be needed. By giving them that accurate forecast you eliminate significant of risk for them. To some extent they're able to level load, but more importantly, their able to adjust their business processes to meet your requirements over time without incurring huge risk of excess inventory or obsolescence. It’s a “win-win.”
Q: One of the topics mentioned in the article was China’s closing of unauthorized mills. How do you think that supply uncertainty impacts our customers and our customers’ supply chain?
TS: You can’t predict what China will do. Often what they say they will do in no guarantee that it will happen, particularly as it relates to steel production. Supply uncertainty rewards those who have good accurate understanding of their own raw material requirements across their extended value chains. Those are the companies that react quickly to disruptions and do so in a way that ensures continuity of supply and a competitive price.
