Predicting commodity pricing is a critical element in business, with great anticipation surrounding the release of forecasts by market leaders such as Morgan Stanley, who predicted increases in gold and copper and declining prices for natural gas, aluminum, and zinc, among others in March 2012’s Business Insider.
Your company may be able to use this information to inform some of your operational strategies. However, you probably require additional forecasts tailored to your specific scenario because the market’s volatility can greatly affect your bottom line.
So how do you make predictions for your company to manage your commodity risk?
Various methods exist to assist with your forecasts, including should-cost modeling, which can help you examine current costs and adjust them to map scenarios of how market changes will affect future expenses. You may also follow price trends to analyze seasonal and cyclical costs.
It’s also critical to employ multiple models and determine the best prediction approach for your business. A fundamental analysis that examines demand and supply as well as macroeconomic factors allows you to gauge strengths and weaknesses in commodity prices. A technical analysis that examines the historical price action and uses charts as visual aids for defining patterns helps you recognize additional trends. Both analyses have advantages and disadvantages, so you must determine when and how each approach works best for your business.
Once you have achieved a range of predictions, you must perform an analysis to determine the effects of your future price predictions. Again, you have several tools to choose from, including scenario and probabilistic analysis, as well as tests such as stress and back testing to gauge accuracy.
Finally, you must apply your analyses to your original should-cost model and update accordingly. As well, you must implement a strategy for monitoring cost influencers and revising your commodity management strategy.
Is your company ready to compete with Morgan Stanley as a market leader in commodity predictions? Does your current prediction strategy require retooling? The Accenture Academy course Predicting Commodity Prices and Assessing Impact can help you develop analysis approaches, predict prices, and drive decisions and actions based on your predictions.