Gross Processing Margin (GPM)
Candlefocus EditorFor example, when considering oil, GPM is calculated by subtracting the cost of crude oil from gas prices to determine the GPM. Backward integration is used to ensure that all costs associated with production and storage of the raw materials are accounted. The GPM is the resulting income after the price of the raw materials are deducted.
For many commodities traders, the GPM is calculated on a regular basis to identify trends in the market. If GPM margins are increasing, it may be an indication that there is an opportunity to capitalise on the increased value of the product. Similarly, if GPM margins are decreasing, it may be a sign that the raw materials are becoming more expensive and it may be time to reduce or exit the trading position.
On a larger scale, the GPM is used to calculate the profitability of a business at a given time. Knowing the GPM allows companies to better understand the sustainability of the business. For example, if the GPM is declining, a business may need to increase prices to maintain the same level of revenue despite rising costs of materials.
GPM is a useful tool for both investors and producers. Investors can use GPM to understand overall market trends and identify areas where buy or sell opportunities may exist. Producers can use GPM to monitor business performance and take any necessary steps to improve profitability.
Overall, GPM is an important concept for traders, investors and producers alike. Knowing the GPM of a commodity helps all participants better understand the profitability of a good and track changes in the market. As GPM margins will vary depending on the commodity and the stage of production, it is important for all involved to understand the margin and how to interpret the changes.