Flostock News #12 Rare Earth Metals
Rare Earth Metals
- Rare Earth
Demand for Rare Earth Metals (not the rock band, but certain rare types of metals that are used in cell phones), will soon outstrip production. Ninety percent is produced in China, but China has been restricting production and export since 2009. Prices peaked wildly in 2011/2012. Countries have been stockpiling. New capacities are starting up outside China. Recently the WTO ruled that Chinese export restrictions should be lifted and the world is watching carefully what will happen. These Rare Earth Metals, with fast growing demand, limited production capacity, artificial restrictions and WTO-enforced releases will be very volatile the coming years with a lot of stock & flow effects. These markets are screaming for supply chain modeling.
Construction and automotive drive demand for steel
- Steel is popular again
A few recent news items (steel production up 25% in February, Rio Tinto breaks iron production record, European car sales is growing for 6 months, Construction is gathering steam) are directly related to each other. The link between the three is the supply chain, which modifies and buffers demand from the end markets before it arrives at the steel mills. Steel makers can calculate their future demand from these extrapolated end markets, provided they take inventory built-up, delays and buffering into account.
Alternative 4 to the Flostock forecasting method: Point of sale
- Point-of-Sale
Some retailers are prepared to collect point-of-sale info and make that available to their suppliers. The biggest advantage of this is that it is accurate and –when delivered in time- gives good steering info. Main disadvantage is that it is not a forecast. It gives the supplier info about what has happened in the –hopefully recent- past. Due to info delays in the chain, fresh POS info can still arrive before the replenishment order, but only marginally. For companies more upstream in the chain who produce half-products that are assembled by their customers into finished products that are sold in retailer shops, the point-of-sale info cannot be obtained because the half-products are used in a large variety of products and sold in many different shops. So Point-of-sale is useful only in certain situations and mainly interesting for an OEM, who can relate the info to his products.
Price follows volume, according to Flostock’s 12th Law.
- Following volume
Price follows volume, meaning that in a free market volume developments are the strongest driver in setting the price. Further we know that price elasticity is low, so if a supplier changes his price with a percentage x, the change in volume is lower than x and often much lower. In formula: Δ(demand)/Δ(price)<<1. That means, in the opposite reasoning, that if demand changes strongly, e.g. in a crisis or a panic, and supply is restricted, the prices may vary greatly, both up and down. Formula: Δ(price)>> Δ(demand). Flostock has developed a model for this. And since down is limited by the bottom (=variable cost, probably), the upward price peak is much higher than the downward price peak. Stockpiling and panic exacerbate the issue further. Confused? Call Flostock and we’ll explain what you can do with this in supply chain modeling.
Price Forecasting for High Volume Products
- Brochure Demand and Price Forecasting for High Volume Products
This brochure deals specifically with products at the beginning of the supply chain, which often are very volatile for ill-understood reasons. Flostock believes the causes are to be found in the supply chain and thus they can be modeled. Interestingly, for the first time, we also want to include pricing. The brochure can be downloaded here. If you are not in High Volume products yourself, you may want to forward this newsletter to a friend who is, and in doing so help them and us find each other. Thanks for that. Let me know and I’ll send you and your friend each a copy of "The Fifth Discipline", by Peter Senge. In this classic Senge explains how important it is for companies to have a systems view. We couldn't agree more, starting with High Volume Products.