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Aluminum shipments rise, risk management becomes vital

Keywords: Tags  aluminum shipments, Brady Plc., Robert De Picciotto, supply chain management, risk management, OpenLink Financial Inc., Henry Bonner, PLS Logistics Services


Aluminum logistics companies have already reported a 20-percent increase in shipments so far this year. While that should be good news for the mills, it also is a problem—or at least a challenge—because low inventories mean little slack in the supply chain to accommodate unexpected changes.

Mills typically handle scheduling, loading and dispatching, but it is the consignees who pay the transport charges and they are putting pressure on suppliers to better manage those costs. As supply chain management is improved, risk management is the beneficiary, with better data available and more advanced systems to spot exposures and excursions.

"Aluminum companies are the furthest along within the metals sector in supply chain and risk management because they have had to deal with so many fluctuations in price," said Robert De Picciotto, chief executive officer of Brady Plc’s physical division, based in Geneva. "The aluminum sector has suffered from huge swings of prices down 40 percent and then up again. They have also been affected by the rapid and severe swings in the price of energy."

Even if industry analysts and service vendors consider aluminum, along with copper, to be ahead of iron and steel in supply chain and risk management, the entire metals sector is still lagging vs. other industrial and resource sectors. The oil industry is regarded as a leader in risk management, largely due to the global and highly liquid financial market options, while the chemical sector is cited as a leader in supply chain management.

Every sector has its challenges, De Picciotto said. "In the past, people have been focused on risk in a piecemeal approach. Where financial instruments were available, the mitigation was focused on hedges and derivatives. Now risk mitigation is moving to a business process. Company executives and even boards of directors want holistic views of their exposures from one end of the business to the other."

In metals, "the goal of the chief executive is to have metals trading be like foreign exchange"—highly liquid, widely diversified in counter-party risk, transparent and quickly settled in well-capitalized markets. "With all the mergers, the strategic view from the head office is across the whole supply chain. You can’t just take a small part of the business."

There is a way to go before aluminum is traded as easily as foreign exchange, but De Picciotto asserts that "risk management in the metals sector is changing dramatically, both in physical and in financial terms." His department handles physical trading, buying, transport and long-cycle transactions.

De Picciotto acknowledges that there is resistance to the holistic approach by a few departments or operations in a few companies, "but most people understand this is the way to go. It used to be enough to say that ‘our mill has good operations in this sense or that sense.’ Not anymore."

A great deal of the push in aluminum has come from traders, both in terms of physical metal and financial instruments, he said. "Just in early April we signed a contract with another aluminum trader based in Europe who is going to deploy our solution first to its U.K. operations and then to Asia. The trend to (supply chain resource management) is particularly strong in Asia" because the aluminum market there is still highly fragmented. Companies of all types—mills, traders and fabricators—and of all sizes see supply chain resource management systems as a way to gain leverage and better compete with larger outfits from North America and Europe.

"Companies in Europe are more willing to look at innovative solutions as a way to get a jump on their competitors," De Picciotto said. "In turn, eventually more North American and European companies will have to address their own systems."

This isn’t to say that the major aluminum mills have been neglecting their systems, but rather "as big companies have merged operations the emphasis has been on upgrades and operational improvements. Now they are starting to realize that the commercial side of their business has been neglected," De Picciotto said, adding that while "the manufacturing side of the aluminum business is simpler, the commercial side is much more complex. But now that manufacturing is OK, the time has come to focus on commercial: workflow, materials flow, storage management, raw materials and logistics."

Henry Bonner, executive vice president of software vendor OpenLink Financial Inc., confirmed the rise in aluminum sector activity, with the surge being driven by several trends. "A good deal of our work in aluminum is with organizations that need to procure the metal to manufacture finished goods, as well as the manufacturers; that pulls in both the traditional trading shops, the banks and the commodity houses."

Bonner is seeing risk management emerge from the corporate treasury operation into more of a line operations responsibility for organizations with aluminum exposure. "Procurement groups at those companies are looking to improve their control, whether they are food and beverage firms, automotive, white goods or others. They are addressing not just price risk, but volumetric risk and counter-party risk," he said.

The latter has become a significant concern within aluminum due to the many and continuing mergers. Fewer, larger suppliers mean fewer competitors. That is not just a price concern but a supply chain liability. "In volatile markets, with global supply chains and regional economics, organizations need to try to balance demand for their products with procurement of their metal raw materials," Bonner said. "It becomes a question of total margin management across the supply chain."

Risk management has become active rather than passive, according to Mark O’Toole, vice president of commodities risk at OpenLink. "Many finished-goods makers these days work with a limited number of counterparties for supply. They need to be very proactive in acquiring physical metal, hedging their aluminum exposures, while constantly reviewing and analyzing volatilities, correlations and risk in the market," he said.

O’Toole said the realization is starting to dawn on mills that the legacy systems and spreadsheets with which they have been doing "quite well so far" aren’t likely to be up to the task of tracking and measuring all the inputs to the smelter. "Transparency into the process is important. It is not just ore and electricity—it is rail rates, work flow at the mill, inventory carrying costs and net movements. Bringing all that together will proactively help manage a firm’s risk," he said

That said, power still looms large in mill operations, Bonner said. "For an aluminum company, power is a significant cost. If you can manage concentrates, metals, power, transportation and treasury all in the same solution, you have a very powerful tool." OpenLink is one of the companies active in both commodity trading as well as energy trading and treasury management.

"All the trends we see across the metals sector are intensified in the aluminum and copper segments," said Jim Ruiz, senior vice president of Pittsburgh-based third-party logistics (3PL) firm PLS Logistics Services. "Everyone is holding very low inventories up and down the supply chain, from raw materials to end-use customers."

Historically, inventory was the buffer against fluctuations in price and supply, Ruiz said, but that buffer has gone. "Now, any change in the supply chain reverberates through the whole thing. You can go from shipping light to jammed in a matter of weeks," he said, noting that this doesn’t stem only from problems but also could result from a new customer or a rush order from a good customer.

That brings to light another level of complexity in supply chain risk management: balancing inventory holding costs vs. logistics costs. Every aluminum mill and fabricator knows that inventory is working capital sitting still, Ruiz said. But if holding little or no inventory means that frequent low-volume, high-cost truck shipments have to be made vs. fewer high-volume, low-cost rail shipments, then low inventory can be a false economy. "You have to be able to compare inventory holding costs vs. transportation costs across all modes. To do the calculus, you have to know relative cost among modes, transit times, as well as inventory and storage costs. Then figure in insurance, margin and your own costs."

Another wrinkle in the tight supply chain is that volatility in commodity and logistics prices "has made forecasting, which was never really that great, even worse," he said. "As all of these other trends have been developing, forecasting has really been degraded. Everyone, from mills to fabricators to carriers, is working hard to find new and more flexible strategies. That makes forecasting very tough." In turn, less-sure forecasting has the trickle-down effect of degrading risk management. In many cases, basic risk management involves building models around past activities and laying forecasts over those models.

Across the metals sector, many shippers are turning to third-party logistics providers for both capacity and insight. This is especially true as in-house logistics and supply-chain staff reductions are made. "We have 9,000 carriers in our system and handle 4,000 truck shipments a day," Ruiz said. "It has fallen to the 3PLs to respond to surges in the supply chain. We can review routings within a region or across the country. The 3PLs have become the shock-absorbers in the industry, in place of inventories."

Third-party logistics providers also have been advancing the re-evaluation of transportation modes. "Historically speaking, aluminum mill customers were multimodal," Ruiz said. "Usually, raw materials would come in by barge or rail and go out by truck. But coming out of the recession, transit times are changing. We are seeing several percentage moves from barge to rail and from rail to truck."

Within the aluminum segment, the main driver for developments in supply chain resource management comes from downstream, Ruiz said. "The OEMs (original equipment manufacturers) and the users are doing more and more to control their costs. They want very precise order flow, and they are pushing that back up the supply chain to their suppliers. As a result, we do see the mills’ supply chain groups becoming more data driven."

Patrick Taylor, president and chief executive officer of BestTransport, another large logistics provider, said that "within the mills it is all about the cost savings to start. The first look is always return on investment. Now that many mills are well along with that, we are getting into supply-chain management being just as much about efficiency as about cost. As the mills roll out new production strategies, those are incorporated into the logistics systems."

Like PLS, Columbus, Ohio-based BestTransport is privately held and handles a similar volume of about 4,000 shipments per day, or 1.5 million annually. BestTransport’s largest customers also are metals shippers, for both truckload and less-than-truckload quantities. Taylor’s company does little work in rail or barge because "most shippers have limited service options in those modes, and also limited chances for cost savings," he said.

Taylor underscored the trend that supply chain risk management for aluminum companies is often driven by their customers. "Some mills have been out in front on this for a while and others are just picking it up. Some just bring it on board to show their customers that they are doing something. The key point of leverage is that in aluminum, freight charges are usually borne by the customer, even though the logistics are handled by the shipper. But once we are working with a mill, costs start to come under control, then we get into logistics and ultimately operations," he said.

In an open system, the shipper sets the parameters for selecting carriers by cost, by reliability and by preferred partners. "A lot of metals companies are now looking to guarantee volumes with carriers to lock in both capacity and rates," Taylor said.

Having worked with many aluminum shippers and carriers, he said one common problem is that sales and logistics often aren’t connected. Sales departments want more or less business in certain products or lines, or in certain regions or times of year, he said. At the same time, dispatch is trying to even out work flow and shipments, or take advantage of available capacity or discount rates. As a result, the two departments can be working at cross-purposes.

In any case, the challenges are only going to grow more acute as the economic recovery accelerates, order numbers and volumes increase, and available carrier capacity becomes tighter.



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