Doom and Gloom!

**ccantu** · 02-06-2015, 09:29 PM

Originally Posted by Scrappah

Stopped in at my usual gas station last month. Premium was running about 4.30 / gal. and regular was about 3.20 / gal. There was quite a spread there.

I already knew why, but i commented on it when i went inside to pay. The gal explained that she had bought that load at a certain price and couldn't go any lower without losing money.

I'm seeing something similar going on with scrap. It's a slow time of year and there's more time to network and build friendships with the other scrappers in my area. We all get together and just shoot the breeze for an hour or two every week. There's little or nothing coming in right now so they're hoarding till the price comes back up in the spring.

Wonder if we could take a lesson from the gal at the gas station ?

Commodities have been dropping for awhile now and don't appear to have hit bottom yet. Folks are holding while the value of what they have in stock is dropping daily.

Wouldn't it make more sense to turn-n-burn ? Get that stuff in and out of the shop as fast as possible so that you're not losing money on it ?

"Dollar Cost Averaging" What you pay for the fuel is not what the liquid in the tank cost, it's what your average cost is over a period. If I buy copper at a healthy margin and it drops .20/lb in a day I don't just hold it because it might lose money. I keep selling and buying at an even lower cost. Over time you have an average purchasing cost, and an average selling price and you only hold enough volume cover what you need to get the best price you can. Fuel prices work the same way. If she's over charging for the fuel she may preserve her marginal target, but she's losing business. Slowing down business works if your commodity is extremely cheap or free and so is storage, but not if margins are thin and space is limited like at a gas station. If that is the case you have to keep the inventory moving out and the new product moving in.

**Scrappah** · 02-07-2015, 12:17 PM

Originally Posted by ccantu

"Dollar Cost Averaging" What you pay for the fuel is not what the liquid in the tank cost, it's what your average cost is over a period. If I buy copper at a healthy margin and it drops .20/lb in a day I don't just hold it because it might lose money. I keep selling and buying at an even lower cost. Over time you have an average purchasing cost, and an average selling price and you only hold enough volume cover what you need to get the best price you can. Fuel prices work the same way. If she's over charging for the fuel she may preserve her marginal target, but she's losing business. Slowing down business works if your commodity is extremely cheap or free and so is storage, but not if margins are thin and space is limited like at a gas station. If that is the case you have to keep the inventory moving out and the new product moving in.

I think i understand what you're saying about dollar cost averaging. The gal at the gas station is a middle man. She works the margin between what she pays her supplier and what she sells it for to the public. For example: She bought load # 1 last month. The following day the price dropped. She ended up selling that load at a loss of .20 cents a gallon. Last week she bought load #2 and ended up selling that at a profit of .50 cents a gallon. If you dollar cost averaged you could say that she showed a net profit of .30 cents a gallon on the two loads. If you wanted .... you could dollar cost average across hundreds of loads. This works in theory.

Was just curious about how things are going for her so i did a little checking while i was out and about today. As i said earlier she was charging 4.20/gal for premium last month. Today she was charging 3.40/gal. Her nearest competitor is about 400 yards down the road and they're charging 2.44 /gal for premium. That's almost a dollar per gallon difference !

I've been seeing reports here on the forum of regular gas selling for under 2.00 $ a gallon.

There's been a massive price drop in this commodity over a very short amount of time. If the gal at the gas station had the foresight to see that this was coming she might have been able to adapt her buying strategy. As it stands now she's in a real pickle because the shelf life of blended fuel is 30 days from the time that it was dispensed from the tank farm terminal. She's not in a position to compete,her product isn't moving, and she's facing the prospect having what she does have in stock going into phase separation.

Dollar cost averaging won't be her salvation in this circumstance. Her best bet in this situation would be to liquidate her entire inventory of premium gas and just take the loss. After that .... mark it down as lesson learned and re-think her business strategy.

Aren't we seeing a parallel thing happening with the small & mid-sized scrap yards ? There have been a lot of reports lately about the scrap commodity prices dropping and yards closing.

The deflationary phase of a recession is just as brutal as the inflationary phase. There's a lot of "winter kill" as the business owners who misjudged future trends find themselves unable to survive in a changing economic landscape.