By Cesar Canali
In a marketplace where the only certainty is uncertainty, and most competitive advantages can be replicated, strategically positioning a business to win over time is easier said than done.
You may have experienced a scenario like this: the market price drops, negatively impacting your customer, who then turns to you to ask for a discount on price. Or, your customer may ask you for a distinct quoting period or back-pricing.
In the past, granting a price discount or an adjustment likely would have immediately impacted your margins. However, strategic pricing tools can now provide the flexibility to grant this request, giving you an edge over competitors without compromising your margins.
One suggestion is to create greater value for your organization by combining financial instruments with marketing and sales strategies. Hedging through derivatives will not resolve all of a company’s margin or sales challenges. And the use of specialized instruments must be properly understood and managed. But at the end of the day, tools like these can strengthen your position and make you better able to respond to customer requests.
Strategic Pricing and Derivatives: An Extraordinary and Little Understood Tool
A small number of companies do enjoy a significantly lower cost of production, higher scale or a brand recognition that commands certain advantages in the market. However, for those making copper cathodes, primary aluminum, electric wire or even beer cans, it can be hard to find sustainable advantages based on price alone.
Going forward, the real conversation will be about neutralizing the effect of price swings and creating pricing flexibility in an unpredictable marketplace. Managers who believe that speculation and hedging are the same thing, or that natural hedges will solve all their problems, will be at a distinct disadvantage.
On the other hand, those who embrace disciplined price risk management strategies will have a leg up. In fact, companies that have turned to a comprehensive risk and price management practice rarely dial back that program because they can see first-hand that it is a differentiator for them with tangible benefits. These tools are complementary to cost efficiency, product quality and customer service in support of the main activity of any business: satisfying customer needs in a profitable way.
In the past, to forecast metals prices we would examine supply and demand, measure GDP and industrial production, check LME inventories, and adjust to refine costs. Using these indicators, those familiar with the market often would have a high success rate guessing the next market move.
These are still important components for a market analysis, but they are no longer the whole story.
One of the most significant changes in the market was the arrival of financial participants with no natural exposure to metals but superior financial knowledge and the ability to leverage using commodity futures. With their arrival, copper, aluminum and nickel became assets instead of raw materials, and the dynamics of price movements changed. Suddenly, those trying to forecast prices had to adjust models and take into consideration the supply of cash in that particular market and the effects of month-end and quarterly fund rolls on prices and spreads.
Today, we have new forces at work, with an increasing number of variables that are not only hard to keep up with, but that offer few patterns as they grow in complexity. It can be exhausting for physical users of metals to try and predict price trends that are now being impacted by geopolitics and forces outside of the market.
Yet these new levels of complexity don’t mean that you should throw your hands up and abandon the attempt to manage risk and prices. Quite the opposite. In fact, more than ever, risk and price management is a needed discipline that companies can use not just to weather the storm, but to gain a competitive edge.
In the uncertain world of tomorrow, that’s one of the best differentiators you can get, and applying new pricing tool and instruments is a smart way to start.