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Staying competitive in the face of volatility.

Commodities Riskprocurement technologyMarket VolatilityNew Technology+-

I have no affiliation with Oliver Wyman, yet find myself again agreeing with their outlook on the future of physical commodities. They claim that volatility is "the new normal" in commodity prices, and to reduce earnings volatility, procurement chiefs need to create transparency, optimise risk/return and share the risk.

 

The question that remains, however, is how?

 

Technology, of course, is the answer. Not simply improved inventory and order tracking software, but online solutions for the negotiation and trade of physical commodities.

 

Why it’s not here yet

 

Suppliers are holding on to whatever opacity is left in today’s market. The smaller the buyer you are, the more margin opportunity for them, and it’s no secret that today’s major trade houses seek to protect profits in their asset businesses.

 

Elsewhere, there’s a misconception that physical commodity transactions are too complex for anything except phone brokerage. You’ve probably seen systems that are nothing more than automated bulletin boards and RFPs (tenders). A viable system, however, will offer you instant price discovery, optionality and cost efficiency.

 

Why the impetus should come from you

 

Of all players along the supply chain, you have the least leverage today and the most to gain from the transparency and optionality that technology provides. If suppliers don’t like the price, they can store it. Your operation, however, probably doesn’t provide significant warehouse space to draw on stocks when nearby supply is tight.

 

Here’s a quick example on optionality: Seller1 is offering raw materials at $100/MT delivered to your plant. Seller2 offers it at $60/MT at the distribution center, which will cost $30/MT delivery charges. With technology, these procurement decisions can happen in seconds, not over a series of phone calls, voicemails, emails, etc.

 

On our present course, the odds of physical commodity regulation in both the US and EU are high. Yet commodities are not as liquid as financial markets and too much regulation could seriously threaten liquidity. Perhaps a little transparency with online trading would be just enough reporting to thwart price manipulation (benchmarking) as well as burdensome regulation.

 

Next steps

 

So where do we go from here? The answer is to build a corporate online procurement strategy. Here’s some thoughts on how:

  • How much can you "commoditise" your procurement? A simple example: Historically, you buy Commodity Special X delivered to your plant. It can only come from four approved suppliers and the bags have to be marked very distinctly. But which of those specs are really necessary for quality control? Can you buy at the port or regional distribution center and contract delivery to your plant separately? Are the bag markings necessary? The closer you are to the world market, the better the prices supply options.
  • Tell your suppliers that you want to interact online. If you have a solution in mind, demand it by a certain date.
  • Let the market know you are open to new trading partners. Make sure your credit department is aligned with this new strategy and you are able to establish relationships within days, not months.

Every week we see more headlines signaling that online trading is coming in the physicals. With a forecast of increased competition among your suppliers, a proactive approach will surely keep you competitive.

 

Julie Lerner is CEO of PanXchange., formerly CMDirect.

Jonathan Webb
Posted by Jonathan Webb