Even considering Covid-19, volatility is normal, leaving uncertainty a constant. It makes sense that market participants may look to long-term pricing to create some level of certainty - some kind of rudder to guide decisions and the business and something to lock down amid the volatility.
The theory is that by doing so - using long-term pricing - one has de-risked the business and shielded against that same volatility. What we are learning is that, for most markets, this is not true.
This is not a Covid-19 story but a story of finding a better way to manage risk - to use market-reactive prices as a foundational method of running a business.
The copper concentrate TC/RC market illustrates this point. Market prices and annual benchmarks have varied since we launched our Fastmarkets’ Copper Concentrate TC Index in 2013. Independent of the impacts of Covid-19, variations between market prices and the annual benchmark have been constant.
Considering Covid-19, spot prices for TC/RCs have risen by 20% since the start of this year, with the spread between trader-purchase and smelter-purchase levels calculated at $7.55 per tonne/0.75 cents per lb, implying that smelters have been able to purchase spot cargoes easily into the low $70s/7 cents - around $10/1 cent above their agreed benchmark rates.
Apart from the real challenge to predict fluctuations due to Covid-19 or the expected uneven reopening of economies in the rebound period, there is still constant risk in the long term: that of persistent variance between market prices and the benchmark.
This constant misalignment ultimately causes inefficiencies. In each year, since 2013, there has been at least 200% of accumulated inefficiency and more than 1,000% in 2019. This means that decisions are made with at best delayed market signals.
Annual benchmarks allow parties to rally around the “going rate”, creating a level of certainty and trust among counterparties. It also introduces unnecessary market inefficiency and constant risk. The ultimate goal - the underlying expectation - is to maintain the level of transparency and trust while enabling trading at the market price.
Find out how.
Markets have been and will remain dynamic.