Impact of Commodity Price Volatility on Share Prices Within the Stainless-steel Supply Chain
Posted on 29th November 2022 at 09:32
The stainless-steel industry is notably susceptible to price fluctuations. Such fluctuations occur almost on a daily basis mainly due to a high dependency on raw material prices. It follows that the performance of companies across the stainless-steel supply chains is greatly affected. Thus, companies consider price fluctuations to be one major business risk influencing their earnings and financial means. Price volatility of raw materials like Nickel, Iron Ore and Ferrochrome (the principal ingredients to produce stainless steel) characterise the so-called commodity price volatility (CPV) risk.
Yet, there also exist other factors, which are of similar importance and impact the performance of market participants (e.g., natural disasters, macroeconomic developments, and political unrest).
Regardless of the type of business risk - CPV or any kind of global-scale development - companies strive for supply chain resilience. On top, a volatile business environment requires strict control to ensure liquidity and financial stability (Krause & Tse, 2016; Zsidisin et al., 2017).
Setting the focus on the stainless-steel industry, Dr Christos Papanagnou and Dr Andreas Seiler from Aston University perform in-depth research to better understand volatility as well as the effect on companies’ performance across the supply chain. Thereby supply chains span upstream from miners to downstream stainless-steel manufacturers.
Dr Papanagnou and Dr Seiler analyse co-volatility between each commodity (Nickel and Iron Ore) stock prices and share prices of key companies in the stainless-steel supply chains. Thereby, share prices represent revenue expectations, which affect business prospects. Share prices are understood to be an indicator of the economic state of a company and its performance, but also future business expectations of the entire industry.
To study the CPV, twenty-eight multivariate GARCH (MGARCH) models have been created. These models represent the same number of different two-node supply chain structures comprising an upstream (miner) and a downstream node (stainless-steel producer). Overall, four miners and seven manufacturing companies are considered. The MGARCH approach allows us to understand the dynamics of the supply chains by investigating the direction of volatility and if the shocks in the stainless-steel market will affect commodity price volatility or vice versa. All the MGARCH models are estimated based on time series data spanning more than 10 years. Post-model diagnostics indicate the satisfying fitting performance of the estimated models..
Undertaking this kind of research is expected to be beneficial for both, theory as well practice. First, it helps companies to appraise the disruption phenomena within supply chains, explore new opportunities, understand the risks associated with political and financial instability and (re)evaluate the new rules of competition.
Second, as the research is based on new ideas, experts presume the transferability of the methodology to other sectors. For this work, Dr Papanagnou and Dr Seiler were awarded the Best Paper Award for Research Excellence at CILT(UK) LRN conference in 2022.
If you feel that there might be some overlap to the supply chains your company is part of, or if you are interested in this topic of commodity price volatility in general, please contact us. The UK-Centric Supply Chains experts can provide you with further insights.
References
Krause, T. A., & Tse, Y. (2016). Risk management and firm value: Recent theory and evidence. International Journal of Accounting and Information Management, 24(1), 56–81.
Zsidisin, G. A., Hartley, J. L., Gaudenzi, B., & Kaufmann, L. (2017). Managing commodity price risk: A supply chain perspective (Second edition.). New York, New York 222 East 46th Street, New York, NY 10017 : Business Expert Press.
Authors:
Christos Papanagnou is a Senior Lecturer in Logistics Engineering at the Engineering Systems and Supply Chain Management Group. He is the Programme Director for MSc in Supply Chain Management and MSc in Engineering Management. He serves also the Group as the Research & Enterprise Lead (External). He obtained an MSc in Information Engineering and a PhD in Control Engineering at the City University of London while his postgraduate studies were funded by the Greek State Scholarship Foundation (IKY). He is also a Fellow of the Higher Education Academy.
Andreas Seiler holds the degree of PhD in economics. He is visiting research fellow at Aston University and performs research focusing on operational research and process optimisation. In his professional career as a Data Scientist, Andreas also supervises Bachelor and Master projects, closely linked to industry. Andreas’ work demonstrates a range of skills and knowledge of modern techniques in big-data analytics, computational statistics, and social network analysis.
To find out more about how UK-Centric Supply Chains can help your business, why not get in contact with us today?
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