This article throws light upon the four major factors affecting the demand and supply of trade. The factors are: 1. Importance of the Study of Demand and Supply 2. Man-Made Factors and Natural Factors 3. Identifying Opportunities 4. The Undercurrents in the Market Place.
Demand and Supply of Trade: Factor # 1. Importance of the Study of Demand and Supply:
This is an important exercise for understanding the markets and for reducing the risks in trading whether it is domestic or international. All business decisions that are spread over extended future timeframe depend heavily on forecasts of the market movement, current and anticipated. These forecasts are based on a number of variables having direct or indirect effects.
The primary responsibility of the trader or the one making the forecast is to visualize an environment and to offer facilities that are conductive for arriving at the right decisions with minimum of the risk element.
The main objective is to interpret the demand and supply conditions for a given product and/or market for a future point of time based on the past and the current data. The more accurate the data the more accurate would be the forecast and lesser would be the resultant risks.
As far as trading is concerned the job is not very difficult as compared to the one of the marketing person especially for the consumer and consumer durable goods and services. The trader dealing with the industrial goods and services is more concerned with the broader category of bulk goods that could be as basic raw materials semi processed goods and/or components and also the finished industrial products, etc.
The ’cause and effect’ are a general phenomenon in our day to day life and students of psychology are familiar with it. In trading also this has a place and works at the market level. A trader is more concerned to the ’cause’ part than to the ‘effect’, because in between them there is a time lag.
This time lag is the reaction time. If the cause is understood correctly the trader gears up for the resultant situation to face the ‘effect’ and for that the trader is more concerned. This gearing up operation requires perfect understanding of the factors that are related closely for the cause and effect phenomenon as they influence the net demand and supply situation at the market place.
Demand and Supply of Trade: Factor # 2. Man-Made Factors and Natural Factors:
The buyers and the sellers are the two active end points where action takes place, what they produce and consume is affected by many other factors that affect the demand and supply position. These factors include both the Man-made and the Natural ones.
(A) Man-Made Factors:
There are basically three major and 10 supplementary factors under this category as detailed below:
1. Major Factors:
(i) Governmental actions and policies (political decisions),
(ii) The industry or the producer segment, and
(iii) The consumer segment.
2. Supplementary Factors:
(i) Strikes and other labour related problems,
(ii) Political considerations,
(iii) Technical innovations and/or obsolescence,
(iv) Corporate shadows,
(v) Shift in the consumer base and taste,
(vi) Cartel formations,
(vii) Formation of trading blocks,
(viii) Wars and regional hostilities,
(ix) Trade sanctions by government and/or international bodies, and
(x) Closures and expansions in related goods/services.
At any given time all the above factors are interacting with each other and can have direct bearing on the decision making process of the trader who happens to be operating in that market and at that particular time. An alert trader studies these forces in isolation and collectively to find their resultant effect on the net demand and supply.
(A-1) The major factors:
(i) The Governmental Actions:
They usually set the ball rolling and the industry reacts to those decisions affecting ultimately the consuming sector. For instance the Indian government’s economical liberalization policies in 1990-91 threw open many industrial areas to private and foreign investors and one such area was the power sector.
This decision came at a time when India as a whole was a power deficient state having very low per capita power consumption coupled with recurring losses by the state electricity boards.
Whether it was due to inefficient power generation and distribution or due to general lack of proper management system, it is a debatable point but the fact was that there was acute shortage of power and funds and India needed a short cut route to augment the supply situation which was so far under state control.
This was a political decision but it energized the industrial activity and many large corporations emerged on the power map. The foreign investors were not far behind some came directly and some joined hand with Indian partners to set up power plants and run them as one do with an industrial unit under certain guide lines for operation generation and distribution of the power.
This action percolates to the industrial sector and creates movement in various related industries.
(ii) The Industry:
The market started humming with industrial activities. Suddenly there was no shortage of generation equipment specially because in the developed countries the generation equipment suppliers were facing stagnation at home markets and were looking for overseas markets for survival.
The foreign investors not only brought the latest equipment but also brought the matching investments and the most efficient management system in the operation and distribution areas.
The cumulative effect was not limited to the power sector only but it stimulated lots of other related industrial activities and created a positive movement in the market especially in the following sectors:
a. Cement,
b. Steel,
c. Infrastructure,
d. Construction,
e. Man power,
f. Fuel (Coal, LPG),
g. Plant and equipment, Instrumentation, etc.,
h. Aluminum and copper conductors and cables,
i. Power transmission and distribution related industries,
j. Capital management,
k. Insurance,
l. Travel,
m. Hotels, and
n. Tourism.
Whenever there is increased activity in the industrial sector there is wider availability of the consumer products. This consumer segment though is affected lastly but has a strong counter effect on the direction of the industrial activities.
(iii) The Consumer Segment:
The better availability of power is the starting point for any activity. This activity produces industrial and consumer goods, both of which have a set consumer base. In fact all industrial activities end in some form of consumer product or in products that indirectly affect the consumer sector.
The availability of consumer goods in itself is a prime mover of consumerism, the demand side automatically surfaces in the open market once the availability is ensured.
The rate at which it picks up is related to the marketing segment of the product movement right up to the ultimate consumer. When Japan was facing prolonged recession (1990-1998) the consumer markets were the first to be hit, there were no consumers but market was flooded with products. This created barrier for further movement in the industrial sector.
So the Government entered the market by way of free bonus checks to every citizen for purchasing consumer items (1997-98). The policy paid rich dividends, once the movement in the consumer products started; it kicked up action and revival of the industrial sector as well.
Mostly global traders deal with industrial goods of high volume turnout, but they kept tab on the down-stream consumer sector as well and gradually increased their presence at all levels (production assistance, distribution, and financing). Mineral water that is an essential household consumer item has attracted almost all the big trading companies.
They not only market domestically produced mineral water but also import from the well-known global brands in France and USA. Sometimes they create demand at the consumer level by direct media promotion (artificial snow fields, mobile campers, eco- friendly packaging, handy phones etc.) The final consumer in all cases is the deciding factor.
Global trader lives very close to them, they always keep eyes, ears and nose in the consumer markets and works backward to define expected demands not only in the consumer goods but also in the reciprocal industrial goods.
(A-2) Supplementary factors:
From the above simple examples (i & ii) we can understand how political decision affects the industrial activities which in turn effect the demand and supply situation in a market.
But these are not the only factors, there-are other factors as mentioned from item ‘i’ to ‘ ix ‘ some have strong influence and some not so strong, some may influence directly and some indirectly. Let us briefly cover these factors and see how they affect the demand and supply situation in a market and how a trader reacts to them.
(i) Strikes and other labour related Factors:
The strikes and the labour unrest affect the demand and supply situation depending on which side is affected, if the strike is in the buyer’s side due to any reason then the goods and/or services of the sellers would be in the surplus looking for the alternate consumption points and vice versa.
Strikes of minor nature might not affect the demand and supply conditions but in the case of a prolonged one it does. The basic industrial and intermediate goods sector is most sensitive to such strikes and the affected parties are quick to switch over to alternate sources.
The consumer goods sector reacts differently, strike at one plant means boon for the others in the compatible range but this area generally does not fall in the global trader’s areas of operations. In case some global traders are dealing in such sectors they are also quick to respond by making alternate arrangements, in this case the reaction time is much less as compared to manufacturers-exporters.
(ii) Political Considerations (Ecological or Environmental Factors):
These days there is growing awareness of our environments. The bright side of industrialization has a darker side also as air, water and soil pollution. The move now is to conserve the environments from any further damage. With the result many Governmental regulations at national and international level have come to play for safeguarding the environments and such regulations do affect the industry and the markets as well.
For instance with the depleting forest cover many governments are discouraging the lumber trade but the industry that depended on the lumber cannot vanish so it looks for alternatives to the wood. For instance in the construction industry steel and aluminum are fast replacing the wood.
The pollution control laws are opening up new markets for the pollution preventive systems. The automotive pollution is forcing the makers to innovate in the engines and/or to make electric, solar or even make automobiles that run on natural gas. No doubt all these activities create new demands and supply situations in the markets.
(iii) Technical Innovation and/or Obsolescence:
Technical innovation and obsolescence are another area of interest in the factors affecting the demand and supply equation. Take the case of telecommunication market that was dominated by the tube based technology but the advent of transistors expanded the market and with the arrival of the chips have revolutionized the market. Who knows it might be only the beginning.
A trader lives in this changing world and has to capitalize on each changing phase of the technology and has to prepare for the coming changes because they also change the consumer base that is the ultimate of any innovation and technology. So while planning for tomorrow know what-how and where the tomorrow would be in relation to the today.
In a very generalized view any invention, innovation and obsolescence they self creates new products and once the products are there with specified utilities the demand and supply for it emerge automatically. The one who realizes such a situation early capitalizes on the new opportunities earlier than others.
(iv) Corporate Shadows:
When you are dealing at the international level it is very important for you to keep track of the inter-relationships of the corporations not only with the country but also in the overseas areas. These inter-relationships play a significant role in the decision-making process covering various issues including the buying and selling activities.
For instance a cement mill in Malaysia uses clinker from a particular source in as far as Turkey and not India that is closer to it, similarly a steel mill in Egypt uses sponge iron from a particular source in Mexico and not from any other. There can be many such examples, which show this type of special tie- ups between the different corporations in different geographical locations.
If the trader understands these links he would not be wasting his time in cultivating them but if at all he has to do it then he would at first try to find out the scope of the special bondage and then evolve strategy for entry into this exclusive zone.
If you have ever seen how the acupuncturist treats the pain in the body you can understand the corporate game as well. The pressure is required not where it pains but what causes it. The simplest explanation could be that in such situations if you want to sell to A hen you have to buy from C or satisfy D provided that D is the point of influence on A.
(v) Shift in the Consumer Base and Taste:
Shift in the consumer base and taste is although related to the consumer and consumer durable goods but all those goods are related to specific industrial products.
For instance if the consumer base is shifting from the cotton textiles to synthetics then it simply means the extended demand for the materials to make the synthetics and those materials are no doubt the industrial products like the soda ash, pulp, various polymers, dyes, toners etc.
The study of this shift is a specialized branch of market research and is more confined to the consumer goods sector. The important point in this regard to be noted is that there is always a time lag between the occurrence or setting of this shift and the industry reaction. The trader who is vigilant to this consumer shift would be well prepared when the industry starts responding to it.
(vi) Cartel Formation:
Cartel formation is one such area on which fewest written information are available. They are rather shunned away or frowned upon by the buyer communities anywhere but still they exist world over. Their formation is the result of basic desires of the manufacturing communities or sharing and/or splitting the markets.
The sugar cartel, the tire cartel, the steel cartel, the soda ash cartel, etc. are just a few of such cartels that do exist. These cartels need not be between the makers of different nations for specified global markets but even within a nation itself certain makers form cartels for operating in specified local markets segments and they might expand their operations to specified international markets.
A trader wishing to operate into the domain of these cartels is bound to fail unless he is accepted by the cartel as a member. So it is very important for a trader not only to know the existence of these cartels but also he has to know how to operate and live with or without them.
This knowledge should form one of the basic variables in his present and future planning if he is or intending to deal in the products and/or areas that fall within the domain of the cartel operators.
The manipulative powers of these cartels are very significant and can affect the demand and supply situation in a given market or product. The area where these cartels exert their pressure generally is the economical side of the business with the price playing important role followed up by the availability and the source(s) of supply.
(vii) Formation of Trading Blocks:
The trading blocks were created out of the need of the interacting nations to form a system for promoting mutual trade and for posing a unified platform to those countries that are outside the domain of these countries. These trading blocks either have free flow of trade within the group or a uniform regulatory system to promote the trade.
They have set rules and regulations for the conduct of trade and a prospecting trader is supposed to have full knowledge of these regulations. These blocks have no resemblance with the cartels. Their entire operative system is in written format and they have a regulatory body for the conduct of trade and provide guidance to traders who intend to operate in their territory.
There are many such trading blocks most important of which is the European Union that was formerly known as the European Common Market and European Community. North American Free Trade Association or NAFTA is another such trading block that has only three countries as members— USA, Canada and Mexico but the internal trade volume has tremendous potential.
Asian Free Trade Association or AFTA is another such block and more recently the pacific ring countries too are moving towards establishing their own trade block. The operative knowledge of these trading blocks gives added leverage to prospecting trader for the better understanding of the market and the movement of the products therein.
Besides the said trading blocks there are commodity specific trade associations as well which regulate the trade of the related commodity. Organization of Petrol Exporting Countries or OPEC deals in petroleum production and pricing, International Sugar Organization or ISO deals with the affairs of the sugar producing and importing countries.
The other similar organizations are the African Groundnut Council or AGC, Association of Natural Rubber Producing Countries or ANRPC, Asian Pacific Coconut Community or APCC, Association of Iron Ore Producing Countries or APEF, International Bauxite Association or IBA, etc.
A trader must have the full knowledge of the relevant trading blocks and the associations for taking full advantage of the facilities they provide in the related areas and commodities. This working knowledge and closer association can boost his operational area and potential for growth in the international trade.
There are many examples when the manufacturers and/or traders have exploited these situations to their advantages. For instance direct entry into these blocks may be difficult but what about the situation when one operates from within the block area.
An electronic manufacturer could not enter a specified block so what he did was simply to shift the production unit within the block using locally made components upto the permissible limit.
This action not only boosted his sales in the block area but also helped the component manufacturers in the area to upgrade their technical level that again offered indirect sales opportunities to the manufacturer to sell his technology and related equipment. In this particular case the demand actor was there but the road to it was blocked.
(viii) Wars and Regional Hostilities:
Wars in any form are both destructive and constructive, the destructive face comes during the times of actual conflicts, and the constructive face comes when the hostilities are over and the countries engaged in the conflict start reconstruction of what they have destroyed in the war.
Leaving aside the two world wars the localized conflicts in the recent history especially in Vietnam, Korea, Gulf and the just concluded or so the Bosnian conflicts are some of the examples.
The reconstruction of these countries had opened floodgates of opportunities and wherever the opportunities are the manufacturers and traders are not far away because these are the potential areas of demand and supply. But the political factor plays an important role and such areas are not open to all but the allies.
(ix) Closure, Expansion, and Additions of Production Capacities:
Addition of capacities, modernization, cut in production and closures are some of the ongoing activities in the international arena and a trader has to have a constant watch over such activities would be crucial for future planning in balancing the demand and supply equation. Let us consider some examples to understand how such activities are related to demand and supply.
For discussion purpose we will take steel as the target industry:
Case 1. Addition of New Capacity:
(a) Availability of steel products.
(b) Opportunity to supply raw materials.
Case 2. Modernization of Steel Plant:
(a) Possibility to get better product,
(b) Competitive prices, and
(c) Increased quantity.
Case 3. Cut in Production:
Possibility to catch the customers who were dependent on this mill or alternative mill.
Case 4. Closure of the Mill:
Servicing the market thus left open through alternate mills.
In the above four examples no 1 & 2 indicate the increased demand, no 3 indicates decrease in demand and no 4 indicates many reasons like mismanagement, financial problems, product related problems, labour related problems, shifting of the production unit due to market and/or governmental regulations, etc.
Whatever be the reason behind the said four alternatives each indicates net setup of opportunities for the traders. No 1 situation indicates excess supply position of the products and also excess demand for the raw materials. No 2 activity indicates supply situation for competitive products and increased availability of the products.
No 3 activity indicates fall in demand for the products either due to reasons associated to end users or due to higher costs of production, another reason could be that the management is shifting partly the available resources to other manufacturing activities.
In this situation except for the first reason the other reasons open up opportunities for the traders to introduce alternate manufacturers to meet the net demand of the market that is vacated by the manufacturer.
Above are few of the examples to show how the demand and supply are affected by the four alternatives. Similar examples could be given for other products. A trader has to watch out for such situations and react in time to capitalize on the new opportunities.
(x) Trade and Politics:
This is the most delicate of the variables in the international trade that affects the demand and supply activities directly and/or indirectly. It will not be out of place to mention that the politics and trade are but the two sides of the same coin, both are tied together, and their separation is just impossible. Trade is the extension of politics and politics is the extension of trade.
They are tied together in an un-ending cyclic formation. Their survival depends on each other’s force and one draws its energy from the other. One of the fundamental causes for this phenomenon is the hidden or apparent desire for dominance. This desire or dominance is as old as the human history.
Countries whether powerful or not so powerful try to extend their area of influence whether it is through the formation of trading blocks, associations or more specifically as government to government assistance in the form of credits, military assistance, technical cooperation etc. All these are but the means to expand the area of dominance and influence.
In all these activities the hidden effort of pushing the sales is always there.
Take for instance in the Gulf war. USA assisted Kuwait and Saudi Arabia to defeat the Iraqis and liberated Kuwait. After the war the major reconstruction jobs landed in the US corporations followed by other allies of USA like UK, Germany, Japan, etc. All had their share of the cake.
But this is not the end of government’s selling efforts. In fact all the governments at all the times try to push the sales of their corporations directly and/or indirectly and whenever these corporations are hit by other countries then these very government interfere to sort out the matters either amicably or by the pressure tactics.
There is nothing wrong in such actions but these actions are beyond the preview of demand and supply at the commercial level. In this case though the demands are there but the supplies do not follow the normal routes rather they sail on the high tide of the government lobbying. Any government which does not push the national cause of global expansion in trade is not serving its national interests.
There are cases in the past and present history when governments sealed themselves within their national boundaries. But all such governments sooner or later opened up to the outside world when they felt the need for expansion of their economy.
The internal demand and supply cannot sustain the overall development of the economy of any country. It is the push and pull of the overseas markets that catalyze the internal development.
This could also be one of the reasons for the global trade. The cycle of demand and supply has to run its full course that covers the areas away from the home frontiers. This also perhaps explains as to why the governments of the nations try to push the national produce service and technology in the international markets especially in the areas where they have some sort of influence.
In India itself we have an interesting case between the Power utility company of USA—the ENRON vs the STATE GOVERNMENT OF MAHARASHTRA.
In this particular case when one of the state government of India cancelled the contract due to various reasons then the state government high officials did raise their voice in support of ENRON and even hinted that investment from USA might be affected if the power project of ENRON was not revived.
Another similar example of governmental interference to support the domestic corporation was noticed when the US government directly intervened to persuade the Saudi Arabian government for switching a multibillion dollar aircraft deal from Airbus Industries to Boeing of USA.
Somewhat similar is the situation when a government extends credit line to another government. The donor country always try to push the goods and services from the donor country to the receiver country by offering either tied loan or by way of appointing a consultant from the donor country.
This consultant generally drafts the specifications and the qualifying criteria so much difficult that outsiders find it utmost difficult to get the job. After all the donor country has the right to push their goods for their money!
A trader has to understand this relationship that is, as said earlier, is beyond the preview of pure demand and supply situation. Whenever he tries to venture into this type of business he has to be prepared for playing a role either at the demand side or the receiver side.
This he can do if he joins hands with someone who is in line with this business meaning that he has the proper connections and can get the things done otherwise it would be just another opportunity gone by.
International trade increases country’s area of influence and also acts as an important tool for defining the foreign policies. The major contribution of international trade, besides improving economic condition, is to bring people together breaking the barriers of culture, language and religion, and increases mutual understanding by eliminating areas of doubt.
(B) Natural Factors:
The natural factors mainly include the weather, rain, cyclones, floods, draughts, large scale earthquake, locust and other plant diseases etc. They are together termed as the natural forces. These forces of the nature have direct bearing on the demand and supply position of the products and services that depend or are influenced by such forces.
Agriculture is one such area which is greatly influenced by the natural forces and causes big fluctuations in the demand and supply conditions.
A trader dealing in those commodities must understand how they influence the demand and supply conditions of the related products, by-products and services. Food-grains, cotton, vegetable oils and sugar and its derivatives are products that affect the main commodities that are much influenced by the weather conditions.
For these commodities some countries are the net exporters and some net importers and some produce enough for their own consumption but due to the weather conditions some countries, sometimes, can have surplus and/or deficit conditions for these commodities and thus they become the buyers or the sellers in the international markets.
For instance India used to be the net importer of food-grains but now has surplus stocks and is a net exporter. Due to bad weather conditions Philippines became the net importer of food-grains, somewhat similar is the situation in China. The draught condition in some of the African countries has almost ruined the economies of those countries.
In 1996-97 over 20 % of the Indonesian pepper crop was lost to the insects infected diseases, the result was 20% lesser pepper in the market meaning 20% lesser stuff for export. But on the other hand India had bumper harvest. Result larger exports from India and the Japanese traders who noticed this climatic/natural conditions, took advance action and diverted purchases from Indonesia to India.
Therefore a trader dealing in the said commodities has to have keen eye on the present and anticipated conditions of production and consumption in the different regions of the globe and especially the one that he is actively operating in so that he can react at the right moment for the right item.
Let us consider the case of raw cotton; the main countries producing and trading in it are:
List-1:
USA, Mexico, China, Brazil, India, Pakistan, Egypt, Sudan and Australia.
List-2:
The main countries that are regular importer and trader of cotton are Japan, Philippines, Malaysia, Thailand, and Indonesia.
A cotton trader would keep regular records of production, local consumption, and exports for the List-1 countries and total imports and consumption for List-2 countries. This data would give him the overall potential of the demand and supply in the listed countries.
The nature has its own ways of working and nobody so far has been able to interfere with it. Weather is just one of the elements of the natural forces, sometimes it is good and sometimes not so good and there are cases when it turns to worst. Agriculture is directly dependent on weather.
Each crop requires a set weather condition and if they are not there the crops fail. It is not possible that all the producing countries always have bumper crop, some will have normal and some not so normal. The producing and the consuming countries mutually compensate this fluctuation in production.
On the other hand it is quite possible that the consuming countries may step up their requirement and scout around for the additional quantity. Whatever be the situation whether at the producing and/or consuming countries’ side the role of the trader is to predict the anticipated fluctuations and make prior arrangements to meet those fluctuations.
This exercise the trader can do only if he keeps track of the production and consumption data of the countries listed in, the above two lists and can make reasonably correct estimation of the anticipated production and consumption.
In the above case we studied how the natural forces affect the demand and supply situation in cotton trade. As cotton there are other products like food-grains, oil seeds, pulses etc.
These are the main crops and they have a number of value-added and by-products that are also affected in the same way as are the main crops. Let us consider a case in which the by-products are affected by these natural forces. In the first example we considered cotton let us now consider sugar.
The main by-products of sugar industry is:
a. Molasses,
b. Acetic acid, and
c. Alcohol.
In fact molasses is the main by-product and other two products are produced from it so their demand and supply would be linked to that of molasses. A bumper crop of sugarcane will produce excess of molasses. This molasses is used for the production of industrial alcohol and acetic acid, both of which are the starting materials for a number of chemical products.
All these three items have large demand in the overseas countries. For example Japan imports large quantities of alcohol from India, and also it imports large quantities of acetic acid mainly from China. The bumper sugarcane crop will make available excess of the said three products that means increased availability.
If the matching demand is not there in the consuming countries then it would pull down the international prices of these commodities. For instance in 1995 the international price of acetic acid was around US $ 600/ MT. But in 1996 due to bumper sugarcane crop in India there was excess availability of this chemical. Similar was the situation in some of the other sugarcane producing countries.
The net result was that the prices of the acetic acid in the international markets started falling down. By April 1996 the prices had crashed to US $ 340/ MT and there was tendency for it further going down since the crushing period for sugarcane in India is up to May. The main reason for the slide in the prices was since the demand did not increase proportionately to the availability.
Thus we see how the natural forces, like weather, affect the demand and supply situation of the products that are directly or indirectly influenced by those forces.
Demand and Supply of Trade: Factor # 3. Identifying Opportunities:
In the present day global industrial scene there is a multiplicity of buyers and sellers. There is no single buyer or seller for all the products and all sellers are not necessarily available for all the buyers and for all the times.
This simple fact explains the imbalances in the market place creating the pockets of demand and supply. The trader’s main job is to identify such areas and find ways to fulfill them or in other words bring some sort of balance in the demand and supply.
A trader has to do a lot of homework in order to understand these situations that stimulate the flow of goods and services between a buyer and a seller as well as their financial implications.
All the business transactions are motivated by the profits and a trader through his vast knowledge can offer alternate routes/products that not only offer better profits but also provide a more effective efficient and dependable service.
A manufacturer has many options to reach his customer base. His main concern is to reach his customers in the fastest possible and economical means without losing the profitability of the operations. Sometimes a manufacturer might put up a specific unit to consume a particular basic product that he either produces or procures under special arrangements from a third or independent producer.
There are also cases when a specific seller ties up with a specific buyer for a specific length of time to supply a particular product, or even there could be technical or financial arrangements between the sellers and the buyers.
Like this here could be many other forms of tied up specific arrangements that keeps the mobility in the market but even under such circumstances the traders are not far behind, for them such situations are the fertile grounds and they have the abilities to create opportunities for their business especially when they are dealing with the industrial or basic goods for further processing at either end (buyer and seller).
A trader is able to operate at both the buyer and the seller’s side because he offers a convenience factor through his services. For example consider following situations in which different manufacturers try to meet their requirements of basic materials through alternative routes.
This is the demand segment because what they require relates to their needs for the production materials in order to manufacture the finished goods. The supply segment will be the sources from where they procure the materials.
There are several ways by which they can get the required materials:
1. A steel mill producing cold rolled steel sheets needs the hot rolled stuff. They can get it from:
(a) Another steel mill under same management.
(b) From an independent steel mill on negotiated agreement.
(c) By way of tendering.
2. An automobile manufacturer needs lots of components, he can get them from:
(a) In house production.
(b) Dedicated ancillaries.
(c) Independent producers.
(d) Combination of a, b and c.
3. Metal can producer needs GI sheets, he can get it from:
(a) In house galvanizing of steel sheets.
(b) From GI sheet manufacturer.
(c) By setting up GI sheet plant.
From the above examples we note that the options available are:
a. In house.
b. Subsidiary company.
c. Independent company.
These are the three basic routes available to a manufacturer to meet his demands and whichever supply route he decides would be dependent on cost time and assured supply factors. The general tendency is to go directly of the supply sources. But in this case the risk factor, the operational costs and the net overhead costs have compounding effect on the product pricing structure.
In-house option requires large capital investment but fewest risks, subsidiary option has lesser capital lesser risk but needs tended management control. The independent option has highest risk, least capital and no management control except at the time of negotiation.
Different industries adopt different options; for example an automobile manufacturer would prefer in house and a cluster of ancillaries scattered round the manufacturing unit. A steel mill would prefer to get raw material supplies from independent sources on long term supply contracts. Whatever be the situation sooner or later trader finds their way in to the supply routes.
How traders are able to operate under such circumstances? When we are talking about the demand and supply conditions there is a physical movement of the goods from one end to other. This physical movement is associated with many other activities that have cost and time as two most important interacting elements.
A manufacturer is basically interested to move out his goods in the quickest, safest and most economic ways so that he recovers the investment on the goods in a most cost effective and efficient means. Similarly the consumer is also interested to receive the goods just in time and in most perfect condition with minimum of cost element. This is possible in an idealistic condition.
But in the market place there are many forces which tend to create distortions in the flow of the goods. The intensity of this distortion would depend upon the level of the demand and supply situation in the market.
There could be three possibilities:
(a) When demand exceeds the supply,
(b) When supply exceeds the demand, and
(c) When demand and supply are stable.
In the first case there would be an inward flow of goods into the market. In the second case there would be an outward flow of goods. But in the third case though the demand and supply situation is stable but the operational part of the movement of the goods would the potential area of opportunities.
In fact the opportunities do exist in the first two cases but in the third case they are a challenge to the trader because he has to create business opportunities for himself and that he does by studying the basic elements that cause the movement of the goods.
These elements are:
a. Transportation.
b. Financing.
c. Delivery scheduling.
d. Competitors and competition.
This case the commodity involved was cement that was being exported from the producer’s country into the importer’s country. The limiting factor was the mode of transportation. The destination port was not big enough to accommodate large vessels. So the shipments were done in smaller vessels which resulted in heavy shipping.
The basic idea behind these four elements or activities is how to do better than what is being done presently, or, how to cut costs so that the total operation can be more cost effective without losing market share or overall profitability.
There is one very interesting case, which shows how a trader managed or rather manipulated the circumstances to his advantage without hurting either the producer or the consumer, both of which were already in business.
The trader devised special plan, which not only helped the producer to catch more of the market but also to make it at a better profit than before. In transportation charges the cargo after arrival at the destination port was to be transported to the bagging unit from where the cement was further transported to the dealer network.
The trader devised a plan under which he will import bulk cement into another country which has large port but also has an export processing zone with ample incentives from the government and low priced labour and availability of local bagging plant and bags which were earlier exported to the bagging unit at the destination port.
The bagged cement will then be exported to the destination market in smaller vessels and from the port it will be directly delivered to the distributors. The cement mill accepted the plan. The trader set up a bagging unit in a third country with local partner investing only 10% in the capital but keeping the rights for cement import and export of the bagged cement.
In just two years’ operations the trader not only recovered his investment but captured almost 40% of the market (from 15%) because under the new plan the net selling price of the cement got reduced by 8.5% out of which 2.5% was offered the dealer networks incentive for increasing the sales and 6% was the cost education in the selling price which made the net market price of the bagged cement marginally lower than the competitor’s.
There is another example which shows how a trader captured a large share of a market starting from zero level. What he did in this case was at first the in-depth studies for the demand/supply and future potential and secondly he used is organizational skills to implement his concept into reality. The product involved in this case was the high pressure seamless steel tubes used in the production of industrial gas cylinders.
The country involved was India which was importing these gas cylinders and there was no domestic production. The trader’s interest was to sell the tubes but there were no importers or manufacturers who could use them. So in this case the demand was there the supply was viable but no user.
What the trader did is summarized in the following lines:
a. Coordinated in setting up a manufacturing unit to produce.
b. The pressure gas cylinders.
c. Necessary technology was arranged.
d. Equipment was imported.
e. When the plant started operation the trader supplied the tubes his main business but also continued to supply the spares for imported equipment.
Demand and Supply of Trade: Factor # 4. The Undercurrents in the Market Place:
The thumb rule is that past demand and supply data coupled with the current situation usually forms the pattern for the future demand and supply. The trader has to understand the frequency and direction of such demand and supply, the current outlets and the possible alternatives.
For instance if a particular buyer uses one particular route then why he does so is more important for the trader to find out rather then what he can offer him. Sometimes the economics of the trade are not relevant to the conduct of the business rather the corporate logistics of it are more important. What appears on the surface is not what lies beneath it.
These invisible forces are called the undercurrents and in many cases they are the deciding factors. Their influence may cover a number of commodities and markets, at home and overseas. A successful trader is sensitive to these undercurrents, knowledge of which helps him to conduct his business more successfully rather than wasting time on the surface movements.
There are many examples that show this phenomenon, for instance a steel mill producing cold rolled steel sheets imports hot rolled stuff from a particular mill and exports the cold rolled sheets to a specific end user. A pharmaceutical firm imports basic bulk drug from a particular supplier instead of using the locally available at a lower price and same specifications.
A power plant operator imports the generation equipment from a particular maker instead of alternate one locally available. A transmission line contractor imports or uses the towers fabricated by a particular fabricator instead of using the locally or from an alternative fabricator. Many developed countries offer untied hard currency credits to developing countries for imports from any source.
There are many examples that show this phenomenon, for instance a steel mill producing cold rolled steel sheets imports hot rolled stuff from a particular mill and exports the cold rolled sheets to a specific end user. A pharmaceutical firm imports basic bulk drug from a particular supplier instead of using the locally available at a lower price and same specifications.
A power plant operator imports the generation equipment from a particular maker instead of alternate one locally available. A transmission line contractor imports or uses the towers fabricated by a particular fabricator instead of using the locally or from an alternative fabricator.
Many developed countries offer untied hard currency credits to developing countries for imports of plant machinery and commodities. The recipient countries issue global tenders but in most of the cases the contracts are awarded to organizations from the donor countries instead of the local manufacturers.
There are many more similar examples that clearly indicate the presence of undercurrents that control the decision-making processes. Success cannot be achieved unless the trader understands these undercurrents and evolves strategies to use their forces for his benefit.
What could be the possible reasons for such under currents? There are many, some explainable and some just understood, some logical and some beyond any logic or politically motivated.
The most common causes for these undercurrents could be:
a. Inter relationships as common management.
b. Arrangement of convenience.
c. Captive usage.
d. Market extension strategies.
e. Techno-commercial reasons.
f. Governmental policies.
g. Raw material availability.
h. The role-played by the government consulting agencies.
i. Supportive factors.
j. Miscellaneous factors.
Some time there is just one reason and sometimes a combination of many but the net effect is that these undercurrents have a tendency to follow a set or pre-fixed route. Any deviation from this fixed route could bring hardship if not disaster to the interacting parties. That is one of the reasons as to why in international marketing circles the forces of these undercurrents are used and not fought with.