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Are we right to trust commodity experts?

RiskGlobal sourcingConsumer goodsManufacturing and engineeringRaw materialsCost and Cash Management+-

In this guest post, Procurement Leaders invites Sourcing eXPerts’ Francois Roblin to share his experience of the pitfalls of relying too heavily on experts’ commodity forecasts.

 

In late 2004, I was appointed group category manager at an international electrical engineering company. One of my first jobs was to define some budget figures for the year to come so I started to gather information about the most used commodities, and in particular the most important one: copper.

 

In the early 1990s copper prices were trading around $3000 a tonne before decreasing steadily down to $1500 in the early 2000’s. When I took over this role in 2004, the price was already back up to the $3000, which no one had anticipated.

 

This from Societe Generale analysts in late 2004: "Demand for copper, aluminium and other base metals used in manufacturing and construction will rise by 5.5% next year, slowing from 2004 as global economic growth cools". It was clear: there would be a pause after this increase. Well, maybe not that fast: in early March copper was up to $3400.

 

Then in March 2005 a Reuters/CRU poll was released which found that average prices for most London Metal Exchange (LME) traded metals were expected to fall throughout the year as output caught up with demand.

 

Could so many experts be wrong? The answer was yes as prices continued to climb, reaching over $4000 by October.

 

In September 2006, I had to perform the budget exercise once again, which I had to admit I had not been very good at in 2005. What could I say? I was puzzled. At this point the market was in a correction, according to the experts, but this time there was some disagreement over how long this would last.

 

"The mega-run for commodities has run its course", said Stephen Roach of Morgan Stanley.

 

"The price of gold has fallen 20% from its highs – so it’s officially a bear market in gold. And commodity prices in general are now down over 10% from their highs (as measured by the CRB Index), so commodities are officially in a correction".

Barclays analysts were not so sure saying: "We continue to remain bullish on copper price prospects and believe markets are underestimating the combined impact on copper supply of the Escondida production losses and those at other mines. We also expect a significant upturn in Chinese buying of copper to emerge before too long."

As it happened, copper prices fell in February 2007, but then went back up over the next few months.. Since then, as one can imagine, I am always extremely cautious when I read expert forecasts about anything, particularly commodities.

 

And, as the world economy seemingly goes back to another period of turbulence, I would recommend that procurement professionals do not rely too much on expert views, but instead build your own, unbiased opinions based on facts.

 

NB. All copper quotes have been expressed in nominal USD, not constant USD.

 

Francois Roblin is founder of Sourcing eXPerts

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