What you don’t know can affect your business

Roger OakdenGlobal LogisticsLeave a Comment

The going on in metals.

We assume the spot and future price of commodities are established on trading exchanges through an open market that prices the imbalance between supply and demand.

True, but events can influence perceptions and therefore the price. For example, events can be short term, where traders think that a disturbance (man made or natural) in countries that supply or use a commodity will affect the immediate supply/demand balance.

Events can also affect the longer term. An example has come to light in America, where there are accusations of market manipulation in aluminium. The story reads that since 2010, a metals warehousing company with multiple warehouses has been restricting supply for beverage can makers and sheet manufacturers; lead times have extended from six weeks in late 2010 out to the current 16 months.

The delivery delays in America can influence (that is, increase) the world price of aluminium, due to how the price of metal is set on the London Metals Exchange, so all users pay a higher price. In addition, users in America are paying storage costs on inventory (to the warehousing company?) held ‘just in case’, due to the excessive lead times.

The iron-ore market

Another example of influence on price is the role of the three major companies in the world iron-ore trade. Shipping capacity has been tight, so by modelling competitor’s output and balancing mine production to the contracted shipping capacity, the spot price of iron-ore can be made volatile, thereby increasing uncertainty and reducing smaller companies ability to compete.

As more shipping capacity has become available, freight rates reduce and there is less volatility, therefore smaller miners are able to provide longer term delivery of iron-ore, knowing that shipping costs are less likely to increase. As more iron-ore is being shipped, the spot price is reduced. So, in this case, shipping costs influence the iron-ore price.

These examples show that professional logisticians need to be abreast of the trade in commodities that affect the materials flows of their business.  The term commodities covers extractive or hard commodities, such as iron ore, copper and aluminium and agricultural or soft commodities, such as grains, plantation products e.g. coffee, palm oil, plus meats and forestry.

You are unlikely to avoid changes to the price of commodities, but you need more market knowledge to enable alternate action plans. Get to know the commodity traders and recognise they are an integral part of your supply chains, even if you do not directly deal with them. At the very least, they can give you sufficient warning of changes and the likely effects; that can make a big difference to your supply chain reports for the CEO and directors.


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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...

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