Do the math: Crashing demand oversupply record low metals prices
The volatility in metals prices is hardly over. But, while purchasing pros look to buy less and pay less in 2009, they also don't want to antagonize their mill and distribution suppliers.
By Tom Stundza -- Purchasing, 1/15/2009 2:00:00 AM
Metals supplier and buyer relationships were fractured in late 2007 and early-to-mid 2008 when prices spiked and deliveries were erratic. As 2009 opens, a vicious dynamic of slowing local and offshore economies and the credit crunch has short-circuited metalworking and metals-buying activities. So, buyers say they are moving cautiously, ordering only what they need and negotiating better prices and payment terms with their suppliers. "Suppliers that exhibit a willingness to work with us are the suppliers we want to work with," says one buyer answering Purchasing magazine's online survey.
"It's going to be a year of disrupted and dislocated supply," says Jim Lawton, who heads up Dun & Bradstreet's Supply Management Solutions Group in Waltham, Mass. "It's not going to be easy for buyers to stay the course," he says in an interview, "because they will have to be aware of subtle changes in activities among the supply base—subtle changes about materials quality, delivery performance and service capabilities that could spell bigger trouble ahead."
That's not to say purchasing personnel aren't making subtle changes in their operations. To many market analysts, for example, it appears that metals buyers are on strike. Indeed, buying has slowed dramatically, with 83% of the metals buyers polled in December purchasing less or the same amounts as the month before. Only 4% of the metals buyers polled last month plan to increase stockpiles this quarter. And a separate survey finds that many purchasing managers are telling their metals buyers to book orders closer to the time needed to avoid building inventories.
Despite already low inventories, most original equipment manufacturers (OEM) believe steel stocks are too high and plan further buying decreases in the months ahead because of low demand. According to the end-November steel buyers' survey by the Institute for Supply for Management, 63% say current inventory levels are too high for demand while 37% say inventories are just right. The ISM survey shows 69% planning to decrease inventory levels in the next six months, while 25% will try to maintain current inventory levels and 6% plan to increase inventories.
A Purchasing.com survey in mid-December shows 52% planning to reduce steel purchasing, 32% thinking that current stocks are just right and 16% planning to boost buying. Only 13% of the metals buyers plan to boost aluminum or copper metals, the Purchasing.com survey shows.
Still, there is no consensus among metals buyers about a start of end-market demand growth. Some mills expect to see an increase in order activity late in the first quarter as OEM and service center inventory levels will be reduced by then to manageable levels. Some analysts also agree that inventory destocking in the steel-distribution sector should end this quarter. Other economists and most buyers, however, see a midyear bottoming of orders because of the continued weakness in construction, automotive and other durable goods sectors.
Steel mills are operating at 50% of capacity and there have been cutbacks in smelting of key industrial base metals. Analyst Michelle Applebaum at MAR Research in Chicago says that "the sudden and rapid cuts reflect the changed reality of the raw material cost inflation we've seen in the past five years."
So, although there has been intensified demand cyclicality, one purchasing manager says that "we always strive for a win-win situation" when developing strategic supply relationships, "and that's not going to change just because the economy has soured." He says that his goal is to find and nurture cooperative and fast-response metals suppliers. "Our needs and supply performance will continue to determine which suppliers will continue to receive preferred status."
Indeed, "the relationship between a supplier and buyer can be and will remain complex," agrees Sara Ireton, assistant vice president with JPMorgan Chase in New York, because "each party wants to maximize its time, resources and cash investment; these may be competing priorities that can strain the relationship." But, a series of buyer surveys finds that suppliers will be under some pressure to improve a basic tenet of effective supply chain management—the delivery of quality goods or services efficiently at the right time and place.
Long-term relationships are possible
So, buyers answering the survey say they are willing to renew or develop long-term relationships with suppliers—"as long as the vendors express a willingness to accept and to adapt to new challenges," says Kevin McGroarty, purchasing manager at Impact Instrumentation, the manufacturer of surgical/medical apparatus in West Caldwell, N.J. Another buyer says that strategic relationships will become even more important as the year progresses—"because these will be the vendors who receive supply chain development or other assistance in meeting supply quality goals."
Nonferrous metals were at a high plateau between 2004 and 2007 while steel prices spiked in late 2007 through mid-2008. Because of that, buyers report 2009 supply contracts with one-year price stability or monthly pricing reviews. This is a key to the near-term future, some buyers report, since there still are problems having sufficient lines of credit to feed short term cash needs to pay suppliers.
Also accelerated this year are the use of full-price transparency clauses, price escalation/de-escalation clauses based on leading economic indicators and supplier requirements of detailed surcharge explanations. "With the recent history of steel costs increasing and then decreasing, our company's supplier development team will be monitoring suppliers' raw materials surcharges in more detail," says Lucia Smith at Carrier Corp. in Farmington, Conn.
Buyers say there also is expanded use of index-based pricing agreements or risk-sharing arrangements if metals prices exceed dead band levels, using an electrical engineering term to discuss movement out of a neutral zone where no action is occurring.
That doesn't mean "driving for the lowest possible price with no regard for the true expense incurred," Ireton of JPMorgan Chase points out, "but rather recognizing that the success of one partner helps the success of the other."
To develop and subsequently maintain a positive supplier-buyer relationship, Ireton suggests that manufacturers should regularly address compliance, conduct and strategic financing concerns with their supply chain partners. David Jankowski, purchasing director at Programmed Products Corp., an industrial sign maker in Michigan, says that "most of our 2009 contracts allow us to review and amend prices on a month-to-month basis if prices fall or increase more than 2%." He adds that the firm this year plans a more aggressive bimonthly review of suppliers for performance and price evaluation.
One buyer says his purchasing group will work both with the manufacturing division and the supply base "to build a better line of communications" this year. Another buyer says this is especially necessary in handling steel supply issues because of the unpredictable nature of deliveries in recent months—with leadtimes stretching from as much as 16 weeks last spring to four weeks or less just now—and the capricious nature of pricing.
"Key suppliers that support our operations get some leeway regarding pricing but not performance," says another buyer. "We want to ensure that key suppliers remain healthy in the down economy."
There are suggestions in the survey that metals buyers should focus on overseas producers by investigating product availability, processing capabilities and financial strength. However, uncertainty in many steel and nonferrous metals markets is keeping buyers from buying from any source except for immediate needs, says David Phelps, president of the American Institute for International Steel in McClean, Va. "The current psychology throughout the steel supply chain has nearly every player sitting on his hands at this time."
Also, news reports now show that steelmakers, copper and aluminum smelters and various base metals miners are trimming output in the light of the deteriorating situation at home as well as abroad. Latest news from traders is that although prices of imported steel products into the Port of Houston are dropping, buyers aren't taking the bait. "There are plenty of offers out there, but no takers" a trader says. "As long as people believe prices will continue to fall, they'll continue to delay buying material."
Survey of buyer-supplier relationships
| Source: Purchasing.com survey |
|
| Will metals buyers help suppliers improve their business processes? | |
| Yes | 83.3% |
| No | 16.6% |
| Are your firms helping to pay for it? | |
| Yes | 0% |
| No | 100% |
| Will metals buyers expand outsourcing partnerships? | |
| Yes | 40.0% |
| No | 60.0% |
| Where will metals buyers emphasize supply partnerships? | |
| Producers | 17.5% |
| Processors/distributors | 17.5% |
| Combination of both | 65.0% |
| Are your supply chain personnel going to be located in supplier plants? | |
| Yes | 9.8% |
| No | 90.2% |
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