VOLATILITY OF THE INTERNATIONAL RAW MATERIALS MARKETS

Kozoroh V. V., Lobanova V. V., Mykhailenko O. G.

Oles Honchar Dnipropetrovsk National University

VOLATILITY OF THE INTERNATIONAL RAW MATERIALS MARKETS

Over the past few years, highly unstable prices in commodities markets have put financial pressure on many producers. Between 2003 and 2008, prices for many of the raw materials used for making industrial products (such as crude oil, steel and aluminum) and consumer packaged goods (such as paper, wheat and milk) rose at double-digit rates only to fall dramatically in the following year. Some sectors have recovered while others remain depressed, but the consensus is that more volatility and uncertainty can be expected going forward [1].

Since hitting rock bottom in the autumn of 2008 and early 2009, raw material prices have regained their strength. During 2010, the three largest iron ore mining companies, Vale, Rio Tinto and BHP Billiton, forced steel suppliers away from their historic one and two year contracts into quarterly or even monthly contracts. With new pricing rules and significant consolidation of the raw material supply base, steel manufacturers will now be looking for ways to reduce their exposure to short term price volatility [2].

One of the key levers to manage price volatility is to review supply agreements with an eye toward minimizing vulnerability in the contract and the spot markets, and toward sharing price risk with the suppliers. In general, when the market for specific raw materials is expected to be "long" – that is, supply outpaces demand by more than 5-7% – it is wise to increase spot exposure to as much as 40% in annual volume needs [3].

By contrast, when the market is likely to be short, an astute buyer would significantly decrease annual spot exposure to 5-10% of yearly requirements. The smartest chemicals firms have implemented sophisticated market intelligence tools that provide an accurate and insightful assessment of supply-demand dynamics that incorporate import-export inter-flows – and they use this data to adjust their spot market exposure more rapidly than competitors [4].

In our view, the greater the volatility, the greater the potential for companies to differentiate themselves from competitors. Deloitte Consulting LLP ("Deloitte Consulting") believes that companies can turn price volatility in raw materials and finished products into a key differentiator, giving them more opportunity to reduce costs, achieve higher average profitability and expand market share. Based on their experience, an effective commodity management strategy has two fundamental characteristics: It is holistic, with a focus on managing the net exposure between the buying side and the selling side. It is based on informed insight and strong analytics. Developing and executing this type of strategy is no small undertaking, but the path is usually clear and the results can help companies in their efforts to achieve business goals and objectives [5].

The list of references:

1. IMF, World Economic Outlook Update: Gradual Upturn in Global Growth During 2013 (January 23, 2013).

3. Synthesis report on the implementation of the provisions of the Accra Accord related to commodities: 2008 to 2012, United Nations Conference on Trade and Development.

4. General Director of WTO about the development of raw materials trade, International Centre for Trade and Sustainable Development [Web resource]. – Access mode: http://www.wto.org/english/news_e/sppl_e/sppl_e.htm

5. "Five-part strategy to defeat price volatility", article [Web resource]. – Access mode: http://www.icis.com/Articles/2012/02/13/9531163/a-five-part-strategy-to-defeat-price-volatility.html