Why You Should Track Raw Material Inputs As A Metal Sourcing Strategy

Consumers of steel products assiduously track the cost of the raw materials that go into the making of steel. The more sophisticated consumers will track a number of other inputs that have an influence on the cost of their components or semi-finished items such as freight and electricity, as part of a commodity risk management strategy.

But buyers of many metallic products who are importing from overseas don’t see the relevance of tracking raw material cost inputs, as they often perceive them as peripheral or inconsequential to the cost of the components or semi-finished products they are buying.

This can be a big mistake — one that can deprive buying organizations of advance warning of price changes.

As Reuters commented last week, prices for iron ore have fallen by about 15 percent in the past three weeks — the fastest decline since October 2011. Demand for iron ore is weakening as demand for steel products has dropped in Asia, leading to steel prices falling by about 10 percent in the last three months.

Other steel cost inputs have sagged along with iron ore. Coking coal prices have been falling since the third quarter of last year, and as another Reuters article advised last week, market sentiment for thermal coal used for power generation remains the most bearish on the commodities complex, with traders and analysts expecting prices to fall even further before a possible recovery in the fourth quarter.

“There is way too much supply at the moment and the strong hydro-power output has made things worse,” Peter Yao, an analyst with Bank of China International, is quoted as saying, adding that China was looking at around 700 million tons of excess coal capacity even before taking imports into account.

Even for consumers of steel or metallic products made domestically, tracking global prices can give advance warning of trends that could impact domestic prices down the line.

Iron ore, for example, remained stubbornly high well into this year even as other metals had fallen; but now, with demand from China slowing and the country sitting on excess steel stocks, iron ore prices are at the lowest level since 2010, according to The Steel Index.

Falls in Asian iron ore prices will ripple through to further weakness in European and North American prices given time, and the same applies for coking coal and thermal coal.

Another facet of this global tracking of input costs could be tracking inputs to your supplier’s supplier. For example, for a product requiring high power inputs, either as electricity or heat, tracking thermal coal prices could give a buyer advance notice of cost pressures on their suppliers, or opportunities for cost reductions, as in the current market.

The trick is keeping the management of this tracking process within the bounds of what is reasonable, balanced with other work day pressures.

If global prices can be secured from just one source — better still, fed through into a firm’s internal ERP system, with history to allow charting and alerts to advise the user of sudden price movements — the whole process becomes easily manageable and the benefits far outweigh the modest effort.

by Stuart Burns