Minimizing Risk, Effective Hedging Amidst Uncertainty Laura Hodges Director, Pricing and Purchasing Service Global Insight
Global Insight Offers Several Ways to Minimize Risk Pull from the latest information Monthly Commodity Price Watch Historical databases Interim forecast please see handouts Understand the risk Scenario analysis Primary risk on commodity prices Leverage supplier cost structure to estimate effect down the supply chain Copyright 2008 Global Insight, Inc. 2
Get the Latest Pricing Analysis from Global Insight Monthly price forecasts can also be downloaded under the spreadsheet table section The Commodity Price Watch offers monthly analysis and forecasts for energy, chemicals, steel and nonferrous prices Copyright 2008 Global Insight, Inc. 3
Global Insight s Industrial Material Price Index Copyright 2008 Global Insight, Inc. 4
Global Insight s Industrial Material Price Index Designed as a leading indicator for inflation Timely and broad-based Unlike other commodity price indexes Weighted average of weekly commodities prices for: Crude Oil Chemicals Nonferrous metals Steel scrap Lumber Pulp Natural rubber Cotton DRAMs Shipping rates Copyright 2008 Global Insight, Inc. 5
Understand the Risk Significant and expanding risks facing the global economy No countries are immune China has been the key in the commodity super cycle over the past five years China 2009 baseline growth of 8.4% China 2009 pessimistic growth of 6.8% Following 5 years of double-digit growth rates Effective supply management limits downside risk Copyright 2008 Global Insight, Inc. 6
Easy to Focus on the Downside But Most nonferrous metals hover near operating costs Production cutbacks create price floors Long-term commodity demand is strong and hinges on the growing infrastructure needs for developing countries With abundant liquidity in the market, the potential for a bust-boom scenario is increasing Copyright 2008 Global Insight, Inc. 7
The Latest Forecast World Real GDP Growth 4.5 Price rebound potential Capacity will be taken offline and investment plans shuttered 4.0 Real GDP (Percent change) 3.5 3.0 2.5 2.0 1.5 1.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Copyright 2008 Global Insight, Inc. 8
When Will Commodity Prices Rise Again? Commodity prices were extremely volatile over the past few years due to: Strong demand i.e. China Capacity constraints Higher costs Iron ore and scrap prices for steel Crude oil for chemicals Higher cost capacity brought online as prices skyrocketed Strong investment interests i.e. speculation Copyright 2008 Global Insight, Inc. 9
The Bottom Line Commodity prices will be near bottom over the next year If you can lock in contracts, it may be your best buying opportunity for the next few years Important to understand the upside potential By 2011 the demand environment and supply constraints will push prices higher How sharply could these prices rebound? Copyright 2008 Global Insight, Inc. 10
The Prototype Based Upon Global Insight's Third Quarter 2008 Forecast Annual Percent Change 2012-2016- 2008 2009 2010 2011 2015 2018 USER INPUTS Operating Costs per metric ton 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Global Nickel Mine Capacity 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Real Fixed Investment China 13.00% 10.00% 9.00% 10.00% 8.00% 7.00% India 11.00% 9.00% 9.00% 5.00% 5.00% 5.00% Russia 7.00% 6.00% 7.00% 8.00% 7.00% 6.50% Brazil 5.00% 4.00% 4.00% 2.00% 3.50% 3.25% Spot Nickel Prices (LME), $/metric ton Germany 2.00% 3.00% 1.00% 0.00% 3.00% 3.00% Japan 2.00% 4.00% 1.00% 2.50% 1.75% 45,000 1.75% United States 2.00% 4.00% 1.00% 2.00% 2.25% 2.50% 40,000 Price of Crude Oil ($/barrel) $80.00 $70.00 $85.00 $90.00 $105.00 35,000 $115.00 30,000 Clients would create their own scenario based upon internal assumptions Nickel prices would change according to client inputs 25,000 20,000 15,000 10,000 5,000 2003 2005 2007 2009 2011 2013 2015 2017 Spot Nickel Prices - Scenario Baseline High Low Copyright 2008 Global Insight, Inc. 11
Thank You Laura Hodges Director, Pricing and Purchasing Service E-mail: laura.hodges@globalinsight.com