My mother had this saying whenever she heard some nonsense excuse: 

“What does that have to do with the price of bananas” which translated to “Your inane excuse for not doing chores is irrelevant. Stop talking and do it”

Over the past 2 weeks, Hot-rolled Steel has fallen another $65 (or 7.2%) to $840 per short ton. Since the beginning of February, Hot-rolled has tumbled $210 (20%), while Cold-rolled Steel is down much less only $75 (5.9%), to $1,205 per short ton. While both Hot (HRS)and Cold rolled (CRS) costs are driven in large part by labor and global energy costs, CRS is less susceptible to price pressures from imports because of limited global capacity.  Further, over the past 3 years, the supply of iron ore has been extremely volatile as Ukraine is one of the larger global suppliers. Further, China has made the decision to de-carbonize its steel production and as China’s mills target the international market, changes there will have an impact on global supply.

Why is this critical? 

  • Steel pricing affects automotive, construction, and a million small and large manufacturers.
  • It doesn’t affect food prices, you say? 
    • What about the trucks and all modes of transportation with companies constantly upgrading fleets with replacement equipment at higher (or lower) prices? 
    • The connection to transportation, among other markets, effectively ensures that every single market in the world-zoo’s to marshmallows and yes, BANANA’S–is affected one way or the other by the cost and manufacturing of steel.
  • Where is the steel made and where is your product made?
    • Chinese Steel market pricing fluctuates differently than the US Steel market

Pricing on commodities is set by a global market, whether it be steel, plastics, aluminum, or agricultural products. The obvious math is that if the price of a commodity used in a product rises, the supplier faces rising costs and will attempt to transfer those cost increases to their customer. Conversely, if the a commodity loses value, the supplier pays less, likely relative to the original price quoted to you months, if not years before.  While the indirect pricing effect of steel can be smaller (3-5%, say), how many 5% price increases can a small or mid-market manufacturer sustain?

Several tools can help a company manage and reduce these costs more effectively:

  • Supply Chain Visualization: A map of your supply chain, or a piece of it, with inputs and outputs from the time a PO is placed. 
    • This creates a customized map for your organization to understand the drivers involved and the ability to better manage them. 
  • An internal Commodity Management program: Commodity tracking can involve something as simple as setting up a market watch on Google Alerts or searching for a reputable commodity tracking agency online. In some cases, you’ll be asked to pay for a subscription. You can align these indexes against the costs you pay from a supplier so that your costing fluctuates in a way that can be managed; In more cases than not, a firm can also tie these indexes into their customer pricing as well

While the cost reductions on commodities aren’t usually significant, a small reduction in raw material costing on a commodity that loses market value can more often than not offset an increase seen elsewhere like General Rate Increases (GRI’s) in from trucking or ocean freight firms.

Managing and reducing costs while creating defensible EBITDA improvements is only part of what a Strategic Sourcing consultant at Forsyth Advisor can do for you. Reach out to us to hear more!

Want to learn more? Reach out to our expert consultants directly