Price Risk Perspectives Versus the Troublesome Truth.

How often we are told “We’re a conservative business. We don’t have metal price risk here.”  But “conservative” does not equal “risk managed” and every metals-based company has price risk in one form or another, yet this is a common claim. The chain of buying and selling, when coupled with a conversion process in between, is especially complex. Hmmm…something smells. Frequent translation: “We don’t really know about our risk, and we don’t track it”.  But this isn’t the only “risk-reducing” idea we’ve encountered.  

“Purchases and sales are back-to-backed” is another common assertion.   Is this monitored in terms of price timing?  Without it, how can they really know?  Time and time again we’ve seen variations in commercial terms, production and shipping patterns or even difficulties with the way ERP systems handle pricing that frustrate even the most deliberate attempts to be priced back-to-back.  They can create exposures with significant financial impact, yet no one understands why, because the business cannot drill back to see the cause.

“We position our inventory for the trend” and “We can time a quick exposure fix” are two major alarm ringers.  In careful businesses, both ideas are risk management malpractice that no sound risk policy would support.  Countless corporate gamblers have turned small exposures into embarrassing mega-losses with such words.  Murphy’s law dictates that such exposures will work out badly, driven by unanticipated events and volatile prices.  Disciplined businesses don’t plan their operations around windfall gains. They take their lumps when unexpected exposures are found.  Shareholders, investors and auditors generally expect disciplined and controlled activities and outcomes for perpetrators aren’t symmetrical.  There’s no reward for good luck but there is punishment for bad.  

“Our knowledge of our market will allow us to take protective action if we need to”.   You may indeed have a superior understanding of local premiums, discounts and local price drivers, but what about the rest of the price that is dictated by a panoply of industry and global economic conditions?  If you’re using the latest world supply-demand balance as your guide, think again.  With exchange-based reference pricing, balance information can quickly become irrelevant, and price forecasts derived from them are poor weather vanes at best.    

Simply put, metal-based businesses with a slapdash approach to managing price risk stand little chance of making last-minute market-neutralizing corrections for significant price exposures.  Does this mean your business must “cease all risk-taking” in whatever form?   ABSOLUTELY NOT – many of the best risk-managed companies take on exposures daily.  But to do this they use a strong management framework, solid control, clear visibility and meaningful measures.   They also know what bite-sized quantities of risk they can live with and how to take advantage of it in a structured way.  If you’re thinking this sounds too good to be true, we’re here to tell you it’s not and if you want to know how you can get there you know who to call.