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Has Commodity Volatility Changed Buying Approaches?.

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Despite the geopolitical uncertainty that has engulfed the world over the first half of 2014 many commodity prices have remained relatively stable. The question for buyers is whether such a lull in the levels of volatility actually changes anything in terms of a business’ approach to buying such commodities?

 

While there have been rises and falls in prices, there has been little of the extreme volatility seen in the wake of the 2008 financial crisis, 2010 Arab Spring and the 2011 Japanese earthquake, tsunami and subsequent crisis at the Fukushima nuclear facility. Volatility will however never completely disappear from the markets.

 

In an interview with Procurement Leaders, Anthony Buchanan, treasurer – SABMiller Procurement, noted that there had been "something of a lull" in both the base metal and the energy markets, saying that he believed this was down to the fact that inventory levels for both commodities were currently high.

 

Stocks of aluminium held in London Metal Exchange (LME) approved warehouses as well as those outside of the LME reportedly stands at around 10 million tonnes.

 

For oil it is believed that the US alone currently holds stockpiles of crude somewhere in the region of 700 million barrels, enough to satisfy global demand for a full eight days.

 

Little wonder then that brent crude has not experienced the same level of volatility it may have done before. On January 3rd prices stood at $106.89 per barrel, rising to $109.85 in late February during the political crisis in the Ukraine when Russia annexed the Crimea peninsular. Prices then fell to $108.61 before rising to $114.81 following an uprising by militants in Iraq, which has seen them take control of towns, cities and strategically important parts of the oil-producing nation.

 

Indeed, the chief financial officer of Irish low-cost airline Ryanair told the Financial Times that there was little prospect of a long-term rise in oil prices despite the uncertainty in the Middle East.

 

CFO Howard Millar said that the company had hedged around 90% of its fuel requirements for this financial year at a price of $96 per barrel, saving the company €70m.   

 

A tone down in the levels of commodity price volatility would be good news for buyers in the long-run with less uncertainty in negotiations with suppliers particularly over price, but there are fundamental market challenges, which ultimately mean that the buying of commodities will never be a straight forward process.

 

In aluminium buyers have long complained about the delivery queues at LME warehouses, which in some instances have stretched to around two years. While recent LME reforms hope to reduce these wait times, there are a number of other problems for buyers to contend with.

 

Indonesia, an exporter of ores used to produce aluminium, have imposed an export ban on such ores. It is believed that if this ban continues prices could be pushed ever closer to $2,000 per tonne.

 

For SABMiller itself, and despite a solid spring planting season, there are lingering concerns in the grain markets as well as in sugar.

 

"Besides Ukraine, there are other regions with supply uncertainty for grains - logistical bottlenecks in Canada are one example; the Argentinian currency play of farmers is another example," said Buchanan.

 

"There is certainly upside potential in sugar. Prices at the moment are quite low and our risk managers believe that capacity cuts in Brazil and the El Nino weather pattern could also impact production," said Viola Markert-Zenkner, commodity risk manager agricultural products at SABMiller.

 

Ultimately there is a little a buyer can physically do about outside events and the impact any volatility can have on commodity prices.

 

All they can do is develop their relationship with those functions like treasury and finance as well as suppliers to get as much timely information as they can and use that to guide their future purchasing decisions.

Tim Burt
Posted by Tim Burt