Metal Musings

For the past few years, manufacturers have enjoyed declining and advantageous input costs on most commodity industrial metals – copper, zinc, aluminum, iron, tin, steel, etc. The party has most definitely come to an end. As the global economy heats up, demand for industrial metals to supply the manufacturing sector in all markets likewise increases, resulting in a steady upward pressure on raw material input costs. Barring another major economic or geopolitical crisis, we have likely seen the last of a softening commodity market for quite a while, and must prepare for a period of increasing cost pressures.

Manufacturers in the USA, particularly small manufacturing enterprises, need to be aware and be taking proactive steps to prevent margin erosion due to negative purchase price variance resulting from these commodity pressures.

Know what your metal purchases should cost – be better informed than the salesman across the table from you.
Hopefully as a manufacturer you haven’t been a passive, price-taking buyer, or a seller allowing larger customers to dictate how material cost inputs are to be dealt with. Hopefully, you already have indexing agreements in place with both suppliers and customers. Most importantly with suppliers, because without such agreements you have likely lost out on the benefits of the past several year’s market and allowed your suppliers to pocket the benefit of declining commodity prices. If you find yourself in that disadvantaged state, there’s still hope. Do your homework now, to fully grasp the implications of what your suppliers shared or failed to share with you, and include that as a firm argument in favor of avoiding, deferring, or reducing price increases they are undoubtedly going to be asking for now that prices are on the rise. Market price information for many industrially important base and semi-precious metals is readily available through sources such as COMEX (CME) and the London Metal Exchange (LME). Unfortunately, price information for the most common industrial metal – steel – is harder to readily come by and often requires subscription to a source such as the American Metal Market (AMM). However, an AMM subscription also includes information about other precious metals, non-ferrous metals, scrap pricing, and raw materials critical for making steel, as well as global news relevant to the metals industry. Expect steel long product pricing – bar, beak, rod, and rebar to temporarily stiffen as Gulf region rebuilding accelerates. As a leading indicator for the direction steel pricing is likely to go, watch for any indication that the Chinese real estate sector, the world’s largest consumer of steel, is maintaining its heady pace or slowing down. A declining Chinese real estate sector will likely herald declining global steel prices, unless China more aggressively takes steel capacity offline.

Scrap is money – make sure you get yours.
Pay attention to your process scrap, where it goes, and what it is worth. Nobody is “doing you a favor” taking it off your hands. There’s money to be made in ensuring you are getting the right value for clean, segregated process scrap that you sell to the “scrap man.” Expect scrap prices in the Gulf region to temporarily dip, as materials enter the scrap market from the teardown of buildings and infrastructure related to Hurricane Harvey. However, scrap pricing in other markets should be unaffected because in general, as prices for raw materials increase, so does the value of scrap usable for recycling into new raw materials.

Leverage large customer master contracts.
If your customers are large enough to offer a master contract under which you can buy raw material, then merely pass through material costs to them, consider signing up. Doing so will eliminate difficult repeated conversations about commodity pressures, and allow you to focus on charging the right amount for your superior value added processing capabilities.

Know what your product should sell for.
Start, if you haven’t done so already, to have discussions with your customers about your product pricing. It will likely take several rounds of discussion before they might weaken and accept a commodity-driven price increase, but the longer you wait, the longer it will take. Any purchasing professional worth their salt will be at the ready with a “NO” answer, so don’t just go in hat-in-hand asking for money. Go in prepared, able to intelligently present your case regarding the need for a price increase given market-driven commodity cost pressures. And be prepared to go in again a few weeks later to again make your case. You may have to repeatedly wear them down, so don’t be surprised if they reject your request, but don’t take it for a final answer either. If your customer extracted price concessions from you as costs decreased, it is all the more critical that you get in front of them now, well informed and armed with rational arguments reasonably asking for price concessions now that the situation has reversed.

The same trends broadly apply to almost any commodity, but especially to metals. Start now to ensure you are getting fair prices from suppliers and scrap dealers, and charging fair prices to your customers.

In summary…

  • Industrial commodity pricing is in on the rise, particularly for metals
  • Hurricane Harvey rebuild efforts may further support steel long product pricing
  • Watch construction in China as a potential leading indicator for global steel prices
  • Monitor other commodity metals pricing via publically available commodity pricing data to see overall trends
  • Prepare now to contain cost pressures from suppliers and to seek price increases from customers
  • Make sure you are capturing the right value from your scrap streams

What can you do?

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Posted by John Hattery in Economy, Global-Markets

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