Not many years ago, I attended a large steel conference. A speaker there referenced his past years’ price predictions by saying, “I sure got that wrong.” To many, picking metal prices as a means of providing a price forecast may seem like a fool’s errand. But in reality, technology and techniques have evolved long past the point of mere “guesswork.” Instead, buying organizations now have the means to accurately identify where prices will go. In addition to this, they can determine specific actions to mitigate price risk, smooth earnings, and generate cost savings.
Challenges Associated with Forecasting Metal Prices
Historic price forecasting methods like econometric and fundamental analysis have a number of challenges associated with them. These include non-actionable buying guidance, fundamentals that don’t map to actual exchange-traded prices, and general inaccuracy. To get a better understanding of how these can affect buyers, let’s take each of these issues in turn.
Non-actionable buying advice is often the biggest problem with most forecasts. It can be hard to know what to do after receiving someone’s “best guess” about a price movement. For example, if someone predicted the price of aluminum at $2240/mt for Q2, what exactly should a buying organization do? Buy forward because the price appears lower than today’s price? Hold off because the price could still drop further? With a “best guess,” the action remains unclear.
Problem With Relying on the Underlying Prices Alone
The second issue – and the one most easily glossed over – involves measuring a metal’s “hype” against its actual underlying price. Take stories like this one, for example. “Copper prices fall despite signs of looming crucial metal shortage.” We see headlines like these all the time. From a “fundamentals” perspective – merely examining supply and demand – one might expect a sky-high copper price. However, copper continues to trade under $9000/mt. This is high, sure, but sky high? Hardly. In short: even when metals are in “short supply,” it will not necessarily equate to higher prices. Therefore, studying the price action of exchange-traded metals remains the only relevant variable for making predictions.
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Finally, lacking accurate predictions can be an Achilles heel for any forecaster. As the old adage goes, “even a broken clock is right twice a day.” The same is true of forecasters who attempt to predict a price point for a specific period in time. This makes track records particularly precarious because invariably, the forecast will nearly always be wrong. Nobody wants to emulate the steel speaker in the opening paragraph. Therefore, a more practical means of forecasting involves understanding the underlying price trend, then guiding purchase strategies against it.
What More Accurate Metal Prices Mean for You
Buying organizations have a choice in how they consume metal market price intelligence. For one, they can seek market intelligence from providers who have not shifted or altered their methodologies in the past twenty years. Alternatively, they can look for solutions that leverage methodologies that address the fundamental flaws of most forecasting services. After all, having powerful, actionable metal buying strategies can make all the difference when trying to manage margins effectively. And in this environment, it is also key to achieving cost savings.
What Should you do?
The last three years have presented plenty of challenges for buying organizations. However, forecasting and making solid buying decisions do not have to be on that list!
By Lisa Reisman via AG Metal Miner
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