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How is manufacturing managing low metal prices?.

Commodities Manufacturing and engineeringRaw materialsCost and Cash ManagementBlog+-

Despite the continued talk of commodity volatility and uncertainty, metal prices have been quietly falling over the past 12 months.

 

Those tracking the London Metal Exchange Index over the last year would have noticed a sustained decline in commodity prices. The aggregated LMEX index (including copper, aluminium, iron ore, tin, nickel, zinc, lead, and uranium) has fallen by 16% over the course of 2013.

 

However, many key manufacturers are finding that this fall in wholesale prices is not necessarily reflected in contracts.

 

"US bank holding companies have effective control of the LME, and they have created a bottleneck which limits the supply of aluminium" Tim Weiner, global risk manager for MillerCoors the international brewer, stated to a hearing in the US Senate recently.

 

"Aluminium prices ... have remained inflated relative to the massive oversupply and record production," he said.

 

The key question is how long this will last. The previous drop in metal prices was related to the global financial crisis of 2008 and we can perhaps attribute the current lull to faltering economies across the globe.

 

Even if this dubious economic environment results in corporates experiencing problems, savvy buyers would be remiss in not viewing present prices as an opportunity. This may involve extending forward contracts or even consider expanding inventories.

 

Interestingly, however, this strikes at the heart of tensions between procurement and financial. Locking up cash in large inventories de-optimises working capital, which has broader implications for publicly traded businesses. A CPO recently stated to me that his CFO was "addicted to working capital optimisation like crack cocaine."

 

Whether manufacturers can take advantage of the recent drop in metal prices also reflects procurement’s influence on the wider business and whether it can make the case for maximising its long-term position in key direct markets.

Jonathan Webb
Posted by Jonathan Webb