Platts

• The Bottom Line: Platts is the world's most influential price reporter for physical commodities, acting as the 'Wall Street Journal' for oil, natural gas, steel, and other raw materials that power the global economy.
• Key Takeaways:
• What it is: An independent Price Reporting Agency (PRA), part of S&P Global, that assesses and publishes the benchmark prices for physical commodities around the globe.
• Why it matters: These benchmarks are the foundation for trillions of dollars in contracts. For a value investor, they are the key to understanding a commodity company's revenue, profitability, and competitive advantage.
• How to use it: Use Platts benchmarks (e.g., Dated Brent for oil) to analyze a company's pricing power relative to its peers and to stress-test your valuation against realistic price scenarios.

Imagine you want to know the price of a share of Apple Inc. It's easy. You look at the NASDAQ exchange, and you see a single, real-time price that everyone agrees on. Now, imagine you want to know the price of a million barrels of crude oil being loaded onto a tanker in the North Sea. Or a shipload of iron ore arriving at a port in China. Or a massive cargo of liquefied natural gas (LNG) heading for Japan. There is no single, central “stock exchange” for these things. The price can change based on the specific quality, the delivery location, and the timing. It's a messy, complicated, and opaque world. This is where Platts steps in. Think of Platts as a team of highly specialized, independent financial journalists for the physical commodity markets. Their job isn't to trade oil or steel, but to report on its price. Every day, their reporters get on the phone and talk to a vast network of real market participants—producers, refiners, traders, brokers, and big industrial consumers. They ask: “What did you buy today? What did you sell? At what price? For what quality and delivery date?” By gathering and verifying hundreds of these data points, Platts' analysts form a clear picture of the market. They then publish a price “assessment”—their expert judgment of the fair market value for a specific commodity, at a specific location, at a specific time. For example, the world's most important oil benchmark is Platts Dated Brent. This isn't a theoretical price; it's Platts' daily assessment of the value of physical North Sea crude oil cargoes that are scheduled for loading. Crucially, Platts does not set prices. It discovers and reports on them. But because of its long history (founded in 1909), rigorous methodology, and wide acceptance, its assessments become the industry standard. When an oil company and a refinery sign a long-term supply contract, they won't agree on a fixed price. Instead, they'll write the contract to say something like: “The price per barrel will be the monthly average of Platts Dated Brent, plus a premium of $1.50.” In this way, Platts provides the common language and the trusted, neutral numbers that allow the entire global commodities trade to function. It turns a chaotic, decentralized market into something orderly and understandable.

“The most important thing to do is to business with people you trust.” - Warren Buffett. In the world of commodities, Platts has become that trusted, neutral party that underpins global trade.

For a value investor, who seeks to understand a business from the ground up, Platts is not just a data provider; it's a powerful analytical tool. Ignoring its role when analyzing a commodity-linked business is like trying to value Coca-Cola without looking at the price of sugar and aluminum.

• Unlocking True Revenue and Profitability: The top line of an income statement for a company like Shell or BHP Billiton is a direct function of two things: the volume they produce and the price they receive. The price they receive is almost always explicitly linked to a Platts benchmark. If you don't understand the dynamics of Platts Brent crude or Platts IODEX iron ore, you cannot build a credible forecast of a company's future earnings and, therefore, its intrinsic_value.
• Identifying Durable Economic Moats: A company's performance relative to a Platts benchmark is a powerful indicator of its competitive advantage. A superior business will consistently achieve a “realized price” that is higher than the benchmark.
  • Premium to Benchmark: Does the company sell its product at a consistent premium? This could signal a higher-quality product (e.g., “sweet” crude with low sulfur), a cost advantage from a superior location (closer to customers), or a brilliant logistics and marketing team. This premium is a quantifiable part of its economic moat.
  • Discount to Benchmark: Does it sell at a discount? The value investor must ask why. Is it because the company is a low-cost producer that can afford to undercut competitors and still be wildly profitable? Or is it because its product is inferior or located far from markets, requiring it to discount deeply just to make a sale? The answer separates a great investment from a value trap.
• Building a Margin of Safety: Commodity markets are notoriously cyclical. Prices boom and bust. A value investor prepares for this volatility by demanding a margin of safety. Platts benchmarks are essential for this. By analyzing a company's break-even costs against the Platts price, you can stress-test your investment. For example, you might ask, “If Platts oil prices fall to $40 per barrel and stay there for two years, will this company survive? Can it still service its debt? Will it be forced to sell assets?” You only invest if the answer is a resounding “yes,” and the current stock price offers a discount even in a pessimistic scenario.
• Separating Investment from Speculation: The financial world is filled with futures contracts and derivatives based on commodity prices. This can create a lot of noise and speculative frenzy. Platts focuses on the price of the physical barrel of oil or ton of steel. By grounding your analysis in the physical benchmarks that real companies use to conduct real business, you are forced to think like a business owner, not a gambler. This is the very heart of the value investing discipline.

You don't need an expensive subscription to Platts to use its core concepts in your analysis. The key is to understand how the companies you study relate to the major, publicly discussed benchmarks.

1. 1. Identify the Correct Benchmark: This is the critical first step. For any commodity-producing or -consuming company, find out which specific benchmark drives its business. This information is usually found in their annual reports or investor presentations.
   • Oil & Gas: Is it a US shale producer? Its oil is likely priced relative to WTI (West Texas Intermediate), and its gas to Henry Hub. An international major like BP? It will be mostly Dated Brent. An LNG producer selling to Asia? They'll talk about the JKM (Japan-Korea Marker).
   • Metals: A major iron ore miner like Rio Tinto? The key benchmark is the Platts IODEX 62% FE Fines CFR China. A steel producer? They will reference regional Hot-Rolled Coil (HRC) prices.
2. 2. Analyze the “Price Realization”: Scour the company's financial reports for the “average realized price” for its products. The company will almost always provide this. Compare this figure to the average for the relevant Platts benchmark during the same period (you can find historical benchmark data on many free financial websites or from government sources like the U.S. Energy Information Administration).
   • Calculation: Realized Price - Benchmark Price = Price Differential (Premium or Discount)
   • Question: Is this differential stable over many years? Is it improving or deteriorating? What does management say is the reason for it?
3. 3. Build Scenarios for Your Valuation: When estimating a company's future cash flows, never simply extrapolate the current commodity price. Value investors must be more conservative.
   • Base Case: Use a conservative, long-term average price for the benchmark, one that you believe is sustainable through a cycle. This is often called the “mid-cycle” price.
   • Pessimistic Case: Model a scenario where the benchmark price crashes and stays low. Does the company remain profitable? Can it survive? This is your margin_of_safety test. If the company's stock price looks cheap only at today's high commodity prices, it's not a value investment; it's a speculation.
4. 4. Listen to Management's Commentary: During quarterly earnings calls, listen carefully to how the CEO and CFO discuss pricing. Do they demonstrate a deep understanding of the market? Do they have a clear hedging strategy to mitigate volatility? Or do they seem to be simply hoping for higher prices? Their fluency with the benchmarks that drive their business is a strong indicator of management quality.

Let's compare two hypothetical North American natural gas producers to see how applying the Platts benchmark concept brings clarity. The key benchmark for US natural gas is Platts Henry Hub. Let's assume the average price for Henry Hub last year was $3.00/MMBtu ¹⁾.

• Company A: “Appalachian Advantage Gas”
  • Assets: Operates in the Marcellus Shale (Appalachia), which is incredibly rich in gas but is located far from the main demand centers on the Gulf Coast, where the Henry Hub price is set. There is limited pipeline capacity out of the region.
  • Reported Price: In its annual report, Appalachian Advantage discloses an average realized natural gas price of $2.50/MMBtu.
  • Analysis: This represents a $0.50 discount to the Henry Hub benchmark. This discount is not because the company is poorly run; it's a structural reality of its geography. It has to pay more for transportation or accept a lower price to get its gas to market. A value investor must build this persistent discount into their long-term valuation of the company.
• Company B: “Gulf Coast Premier Gas”
  • Assets: Operates right on the US Gulf Coast, with direct pipeline connections to major industrial users and LNG export terminals.
  • Reported Price: Gulf Coast Premier reports an average realized price of $3.10/MMBtu.
  • Analysis: This represents a $0.10 premium to Henry Hub. Why? Because its gas is perfectly located to serve the most valuable customers (like international LNG buyers who pay a premium for US gas). This premium is a clear sign of a locational economic_moat.

The Value Investor's Conclusion: A superficial analysis might show that Appalachian Advantage produces more gas than Gulf Coast Premier. But the value investor, using the Platts Henry Hub benchmark, sees the truth. Gulf Coast Premier is the superior business. For every unit of gas it pulls from the ground, it earns $0.60 more than its competitor ($3.10 vs $2.50). This powerful advantage will translate into higher cash flows, better returns on capital, and greater resilience during periods of low gas prices. Your valuation for Gulf Coast Premier should reflect this durable competitive advantage.

• Standardization: Platts creates a “lingua franca” for global trade. A Japanese refiner and a Saudi oil producer can sign a contract based on a common, trusted benchmark, simplifying commerce enormously.
• Objective Valuation Anchor: For investors, Platts benchmarks provide a crucial, third-party data point. They help ground the revenue forecasts in a valuation model in external reality, rather than just management's optimistic projections.
• Insight into Pricing Power: Analyzing a company's price realization versus the benchmark is one of the most direct ways to measure its pricing_power and competitive position within its industry.
• Macroeconomic Indicator: Key Platts benchmarks, like copper or oil prices, are excellent real-time indicators of the health of the global industrial economy.

• Methodology Can Be Opaque: The process Platts uses to create its assessments, particularly the “Market on Close” (MOC) window, is complex and proprietary. It is not as transparent as an open exchange, and it relies on the judgment of its reporters. It has, at times, faced regulatory scrutiny.
• A Snapshot in Time: A benchmark price is a reflection of today's supply and demand. It offers no guarantee of future prices. A common and dangerous mistake is to assume that today's high prices will persist indefinitely. Commodity prices are cyclical and subject to mean_reversion.
• Applying the Wrong Benchmark: An investor who uses the WTI crude oil price (the US benchmark) to value a company that primarily produces and sells oil in Europe (priced off Brent) will arrive at a flawed conclusion. The details matter, and using the correct, specific benchmark is essential.
• Risk of “Financialization”: Because these benchmarks are used to settle trillions of dollars in financial derivatives, their prices can sometimes be influenced by large financial players, causing short-term dislocations from the underlying physical market fundamentals. The value investor must always try to see through this noise and focus on the long-term physical supply and demand story.

• commodity
• cyclical_stocks
• economic_moat
• pricing_power
• intrinsic_value
• margin_of_safety
• circle_of_competence