The Ford Billion Dollar Loss
On January 16, 2002, Associated Press had a story pointing out that Ford Motor Co. had committed a classic left-hand / right-hand blunder.
It seems that one part of the auto giant had attempted to corner the market on a key element of their vehicles by buying a large quantity of palladium. The price: roughly $1,500 per troy ounce. Only thing was, the company admitted, at the very same time Ford’s research labs “did a magnificent job of reducing our dependence on palladium.” As a result, the price of the precious metal dropped to $400 per troy ounce. And Ford was left holding the bag – a billion-dollar bag no less.
An article in the Wall Street Journal on Feb 6, 2002 provided more details.
"The purchasing staff was used to buying standard commodities such as steel and copper that weren't as subject to big price swings. Unlike GM, Ford's purchasing did not liaison with the financial experts who might have helped with hedging strategies to help lower the eventual price of the metal.
R&D was also apparently operating independent of purchasing managers, as the former found ways to decrease palladium usage while the latter kept buying up supplies of the metal. It turned out that Ford ended up locking in a huge supply at or near the top of the market (the price hit $1,094 per ounce in January 2001).
Demand began to fall throughout 2001, while the Ford R&D team unveiled a new method that would halve the amount of palladium required. Automakers required less palladium, and other users such as the electronics industry were mired in a downturn that lowered overall demand. Meanwhile, Russian supply began to stabilize, while South Africa, the other big producer of the metal, increased production.
The combination of increased supply and decreased demand drove prices down to $350 per ounce, and they remain below $400 per ounce in 2002. Ford is now sitting on a stockpile of metal for which it paid high prices and no longer has much use. The company used 1.5 million ounces in 2001 (and will halve that amount in the 2003 models), but it is sitting on an estimated 2 million ounces of either actual product or agreements to buy more of the product at high prices.
As a result, Ford revalued the inventory at the end-of-year market price of $440 per ounce, resulting in a $1 billion write-off."
