I recently wrote about the 400% increase in steel prices over the past 6 years AND the lack of consensus among suppliers as to where the price is heading in the short term. In other words, prices are extremely high and relief may…or may not…be around the corner.

Given the state of things - high prices and uncertainty - what can buyers do to cope?

Unfortunately, there’s no magic bullet. But even with this rollercoaster ride we’re on, there are steps buyers can take to reduce the costs, risks and apprehension.

• Push for Transparency - By working with suppliers to understand their raw material and fabrication costs, buyers are better able to help suppliers cut costs and better understand pending price movements. Large buyers may even look at sub-tier sourcing the steel and holding negotiations with steel mills on behalf of their middle-tier suppliers. Although suppliers will be resistant to adopt an open book pricing policy, suppliers can benefit by entering a longer-term relationship with buyers through the presence of shared cost risk and rewards.
• Your Costs vs Your Selling Prices - All too often, there is a poor relationship between raw material cost and end-use product prices for customers. But, the speed at which a company can change their selling price in response to cost fluctuations will likely be the primary factor in deciding a company’s overall profitability in such a volatile market as the steel industry. For example, Renault and Chrysler recently announced 1.5 - two percent price increases in automobiles in response to raw material cost increases.
• Price Adjustment Clauses are Here to Stay - The days of holding annual negotiations to set fixed price direct material contracts are over. Although this allowed for easy pricing forecasts, the current extreme volatility requires the use of adjustment clauses to ensure a continued stream of supply. While buyers may not be able to adjust your selling prices on a monthly basis based on raw material volatility, you can work with preferred suppliers to creatively limit exposure to unexpected price increases by sharing the cost increases and decreases.
• Watch the Cost Drivers - Becoming a vigilant cost driver analyst is very much a requirement of a successful strategic buyer in today’s metal industry. Buyers of metal products must not only watch raw metal price indexes on a weekly basis, they must become a student of the cost drivers as well. There is no substitute for understanding the trends in factors such as scrap, iron ore, currency fluctuations, and energy costs when trying to formulate a forecast of metal prices. At a minimum, buyers should maintain a membership to an industry publication and assign the tracking of industry trends to members of their buying team. I’ve even worked with some companies that have formalized this approach and assigned team members to be responsible for watching the trends in various cost drivers in order to give the team a bit of foreshadowing on pending steel price fluctuations.

I expanded on this list of recommendations and tied it in with several other observations, datapoints and trends in the feature article “Steeling Your Profits” in this quarter’s SupplyWatch. The full article is available here.

Mike Petro is the Senior Category Manager for Metals in Ariba’s Global Services Organization. Previously, Mike analyzed supply chain options and competitive pricing for US Steel and Timken Latrobe Steel.