Your customers may demand that you give them firm pricing for raw materials, but here are 4 reasons that say “Ain’t gonna happen.”

" Why yes,  I can hold that price firm for the year" said no one in their right mind. Ever.
” Why yes, I can hold that price firm for the year” said no one in their right mind. Ever.

  • BUSINESS CYCLE Business Cycle is currently in a downward phase. what savvy organizations should be doing right now is planning for budget reductions, cross training employees, evaluate vendors for sustainability. Nothing in the business Cycle justifies firming up pricing at this time.
  • BIAS TOWARD GROWTH Everyone expects the prices of things to grow, particularly for commodity raw materials. The Steel Benchmarker chart for hot rolled steel band shows that this is hardly ever the case…
  • VOLATILITY That Steel Benchmarker chart  shows a price differential ranging from 4.5% in 2012 to a high of 100% in 2008. This is why your customers want firm prices, not why you should bet your business on giving them firm prices over which you have no control.
  • DETERMINANTS OF DEMAND What is driving demand for the raw materials? is it even North American, or is it China or emerging economies? Global demand is typically what  is driving prices here in US and around the globe. US GDP growth  in 2013 was estimated to be 1.6% China’s  7.5% Pick a number. Any number.

Customer’s seek firm prices to eliminate their risk, but shoving risk onto suppliers unilaterally is  not eliminating risk, it is just getting it off their desk and onto yours. Our job as sustainable, competitive, quality suppliers is to intelligently manage risk. In today’s raw material environment, saying “No!” to agreeing to hold firm prices for raw materials  when you have no ability to effect that price’s firming is intelligent management of risk.
Full article on why you are not the Carnack of Metals.

First you have to recognize it.

It is difficult to intelligently manage risk if you don’t even know how to measure that risk. What are the units?

The media talks today about “tapering” as if it is going to be news. Yet they fail to report the actual reality of the market consequences of the Fed’s Asset purchases.

First, a graph of the Fed Balance Sheet:

fed balance sheet

One result of this is a Volatility beyond our awareness.

Last week,  the yield on the 10-year Treasury hit 2.855%.

On April 26, the yield was 1.64%.

That is an astounding 74% increase. In Treasury yields.


For perspective, if the Dow had gained as much over the same time frame- it would now be  in the  25,551 neighborhood!

The media is missing the story.

We have unprecedented volatility in our financial system today.

So how do we see it as manufacturers?

DGORDER_July 2013

The Commerce Department said on Monday (July) durable goods orders dropped 7.3 percent as demand for goods ranging from aircraft to computers and defense equipment fell. That was the biggest decline since last August and snapped three consecutive months of gains.”- Reuters

Contrast that to the gushing ISM report for July from the Economic Populist blog: “The July ISM Manufacturing Survey shows PMI had a blow out increase of 4.5 percentage points to 55.4%.   Manufacturing has moved into sold growth with new orders increasing by 6.4 percentage points and production roaring in an 11.6 percentage point gain.   Even the employment index increased.”

These are Volatile, Uncertain, Complex and Ambiguous times. We need to look for the story behind the story behind the story.

I am reminded of a classic Richard Pryor/Groucho Marx line  “Are you gonna believe me or your lyin’ eyes!?”

When it comes to economic indicators, It is in our best interest to try to recognize and challenge the underlying assumptions.

How do you intelligently manage risk in the current economy?