Purchasing Commodities is like Surfing
Raw material experts of Inverto AG advise to reduce dependency on price fluctuations by actively managing the cost of raw materials now, and to secure income.
Only recently were buyers shocked about rising steel and energy costs, whereas now expectations of a recession as well as the financial crisis and a rich harvest of agricultural commodities have led to sinking commodity prices. But things are not the way they look, according to Inverto AG. “The current price movement is no reason to lean back. And certainly not in an increasingly difficult economic environment,” the Cologne consulting company warns. Inverto supports its customers in strategic purchasing decisions and supply management.
They think that a perfect timing of decision-making and contract term are the crucial factors in procurement. Both can be identified by observing commodity markets systematically.
According to Inverto, the long-term rally in commodities is not over yet and will keep companies busy in the next few years. Due to their profound knowledge of markets and projects, experts are expecting a considerable change in margins for the average prices in 2009 compared with 2008: e.g. for steel, margins from a 15% decrease to a 5% increase, which are caused, among other things, by a continued drop in scrap metal and iron ore prices; and for synthetic granules, from an 11% decrease to a 5% increase. Due to the good wheat harvest in 2008, prices have fallen by more than 20% so far.
Markus Bergauer, member of the management board at Inverto AG, says: ”It is a fact that prices of industrial and agricultural commodities have a direct impact on corporate earnings. According to the purchasing consultants’ experience, companies are often insufficiently prepared for widely fluctuating procurement costs. “Purchasing commodities is like surfing. Now the time is right for building a powerful raw material management,” Frank Wierlemann, member of the management board at Inverto, says. For him, a perfect timing is essential when determining both, purchasing date and contract term. Companies should put themselves in a good negotiating position for the next year.
Inverto advises against favouring one single solution such as hedging or global sourcing, as levers of strategic price management for commodities vary, depending on industry and company. “The packaging industry with its high share of commodity prices, often more than a third of total costs, disposes of all relevant information regarding commodity markets,” Sebastian Mayer maintains, head of the Inverto Excellence Center Industrial Commodities. Subsequently however, companies often do not systematically implement those steps giving them room for manoeuvre. An automotive supplier, whose share of raw materials makes up just under 50% in terms of purchasing volume, has been able to cut raw material costs by around 7% by adjusting some of the levers. With 66% of its overall purchasing volume, a food company had an even higher share of raw materials. Raw material cost management has lowered its purchasing prices by 4%, with a huge impact on total costs.
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