What is the real value of a commodity? That’s a question I am frequently asked when valuing a company or an asset. While it might sound easy, just look at the sales price, its definitely harder in non terminal market commodities, like most ferroalloys.
While some commodities have quasi producer prices, most rely on indexes to establish a value. However, the discounts are often nowhere near the “real” value since the indexes are discounted, some by a significant margin. Finally, only a fraction of the business is reported to the indexes.
Faced with this conundrum I developed a benchmark system.
The system takes into account 1) the discounts off the indexes, 2) actual fixed price sales (with delivery 30-45 days from acceptance); 3) and an algorithm that takes into account weighted tonnage. The benchmark will be c.i.f. warehouse or f.o.b. plant with standard credit terms. Of course, I will be checking with my insiders to keep the benchmark on course.
The benchmark will be updated whenever needed, so it might be revised two or three times a day or two or three weeks, depending if there was a significant move.
It will be a single number, no range. The price will be in decimals. I will use the ASTM specifications for the benchmark grade.
The initial four benchmarks will be all US based and be silicomanganese, 75% ferrosilicon, 0.10% C low-carbon ferrochrome and 4% carbon ferrochrome, 50% basis. Other commodities will be added as needed.
I am using the carbon content to cover both high carbon and charge chrome.
Because I am taking into account the discounts off the indexes, the benchmark should be lower than published prices. If seller believes the commodity deserves a premium, that premium should be negotiated between the buyer and the seller and won’t be included in any benchmark.
The purpose is to provide an indicator of value. I am sure there will be complaints, but I believe the current system doesn’t provide an accurate reflection of value.
The benchmarks will appear on the opening page of the blog. Readers can download data as a PDF file or an Excel document. They can also print or copy the data all with the table control icons on the top right hand side of the table.
The table data can be sorted by clicking on the column headings. So if you want to sort by commodity name, you would click on the metal column heading.