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Is Now the Time to Lock in Steel Prices?

November 7th, 2008 · by Mike Petro · 1 Comment · LCCS and trade, automotive sector, best practices, sourcing, supplier management, supply management, supply risk

I recently wrote about the dollar gaining strength and the plummeting price of steel. It’s a welcome change after years of hearing a broken record on direct materials…higher prices…higher prices…higher prices…

Naturally, when purchasing power goes up and prices go down, buyers want to act on the opportunity, and many ask “is now is the time to lock in pricing?” But for most categories, it’s not that simple and is rarely the best long-term approach.

Although you might gain some short term cost savings, they’ll come at a heavy price if your suppliers can’t maintain a profitable relationship as their costs go up…and they will go up at some point. Squeezing suppliers is a hard temptation to fight, but it could ultimately lead to a disruption in your supply chain. Quite frankly, a vendor who’s margins are squeezed will eventually either cut you off, go out of business or raise their prices (existing contracts be damned!).

For a recent example of how this scenario will play out, you only need to look back 6 months to when ArcelorMittal, US Steel and WCI Steel and other mills each increased base prices in addition to surcharge adjustments, despite the fact that they had existing price agreements with buyers all over the world. But the alternative - a world where suppliers continue to take the hit on prices - could look like the automotive industry, where critical suppliers have gone under.

The reality is that most steel buyers and suppliers have to work with pricing that’s either tied to an index or contracts with raw material adjustment clauses. That approach is the best way to protect against volatility and lower the risk of supply chain interruptions.

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.

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1 response so far ↓

  • 1 Lisa Reisman // Nov 10, 2008 at 10:32 pm

    When should I lock is the question many companies are asking these days. And like Mike suggests, buying forward in a downward market is not necessarily the best strategy. But I’d like to suggest some different reasons as to why. First, I believe steel producers have still quite a good way to go down in their price cycle (and still profitably do so) - probably at least another 20-30% by Q1 2009. Second, since companies have been hit hard with the price increases, why not take the margin relief and ride the market down? Steel is still more expensive today then it was a year ago. If you do choose to lock-in volume, as Mike suggested, an index is a great way to ride the ups and downs of the market, while still giving your supplier some leeway to maintain profits.

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