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January 1, 2006

Fortune Teller

Life is unpredictable, but business doesn't have to be. Here's how your peers are using MSCI's Metals Activity Report to their advantage.

Anyone working in the metals industry—or any related field—knows that the past few years have seen unusual volatility (see “Managing in Chaotic Times”). While some upheavals might seem to come out of nowhere, turns of the market can be predicted.

“The steel market a year ago was more speculative than it should have been. Inventories were out of whack with shipments. Many in our industry felt like they were flying blind,” says Michael Petersen, president of Elk Grove Village, Illinois-based Petersen Aluminum Corp., which actually sells more steel products than aluminum ones.

Petersen says the industry has access to the kind of information that could have shed light on the disconnect between inventory and orders in the Metals Activity Report (MAR).

While MSCI has been producing data reports since 1977, the new MAR (see sidebar ) is an improved economic indicator that offers more than just a snapshot in time.

“I do not think we, as an industry, are using this simple tool as we should,” Petersen says. He suggests that had more companies been analyzing the MAR in the third and fourth quarters of 2004, they might have stopped building inventory as early as August, rather than waiting until January 2005, when demand started to slacken. “The fact that inventory built for five or six months tells me the industry was not using those reports,” he says.

Unlike other economic metrics, the MAR has some significant practical advantages, says Michael McCoy, president of Lisle, Illinois-based McCoy, Scott & Company. The economic consulting firm has been compiling the monthly MAR for the last 21/2 years, using data from publicly and privately held companies of all sizes.

Companies provide information during the first 10 days of the month about the previous month’s shipments and inventories and the turnaround is quick. MAR is available by the third week of the month.

Unlike U.S. Census data, that becomes available three years—or more—after it was collected, MAR data is relevant because of its timeliness, and can therefore be used in making management decisions.

McCoy, Scott and Company takes the facts provided by the participating companies—both aluminum and steel—and creates, graphs and charts that suggest more than a moment in time.

“We look at recent history of sales trends and shipment trends. If we see the level of inventory going up, for example, that is a clue that perhaps demand will be falling in the near future,” McCoy says. “We can go well beyond the data provided by the companies that participate to see where the market is going.”

Petersen agrees that the MAR can play an important, if indirect, role in management decisions. “I know my purchasing staff is all using it to some extent, particularly when we see an inflection point.” Petersen says knowing where the market is going can’t change the facts, but it does help his company both prepare and react.

“When the announced price of material is going up tomorrow,” he says, “the instinct is to buy as much as you can today. When the roller coaster is going up, that makes sense. But when the roller coaster starts going back down hill, companies are forced to liquidate. It is the same old vicious cycle we as an industry have always faced,” he says.

Petersen considers the MAR a macroeconomic tool that “tells me what my competitors are up to in the grand scheme of things.”

Timna Tanners, a steel analyst at USB in New York, says the MAR gives her an accurate sense of where the industry is going. She calls the report “critical” because “there is nothing else like it to look at. Even if it is not 100% accurate, it gives you a really good picture directionally.”

Petersen cautions new MAR users to think of the report as a guideline rather than as an operating manual. In particular, he says, he uses the three-month projections, provided only to companies that participate in the survey, to figure out where his company may diverge from the pack.

“Our business model does not always follow in lock step with what our competitors are doing. We use our imagination to overlay our company’s experience with what the report is telling us.”

 

INFORMATION HIGHWAY, MSCI-STYLE

The process of reengineering doesn’t apply only to companies that are updating their processes and products. MSCI, too, has re-engineered its offerings, most significantly the Metals Activity Report (MAR). Using distributor shipments and inventory reports (which were called Business Conditions II prior to 2003), MSCI has created a new tool for both measuring and predicting the cyclical nature of the industry

The MAR is based on information provided by a large sample of North America’s metals distribution companies, representing a significant portion of metals distribution industry shipments. The shipments of metals service centers have been found to relate closely to activity in final market demand.

The MAR covering the United States and its companion Canadian report are available in four versions, each with progressively greater depth of information, and are customized for different audiences:

  • The Press/Public Report features only the overall industry shipment and inventory totals.
  • The Subscriber Report breaks down industry totals by 12 metals categories.
  • The MSCI Member Report includes seasonally adjusted shipment statistics.
  • The Survey Participant Report—distributed to the companies that provide the information for the MAR—includes participating service center-specific data, a comprehensive, graphical analysis of industry performance and a three-month projection of industry shipments.