Complete Manufacturing & Distribution Blog

Commodity Prices on the Rise Globally

Dec 6, 2016

Global commodity prices respond to the laws of supply and demand.  When supplies are scarce, prices rise.  With manufacturing gaining steam worldwide, prices are up for many major commodities. How does this impact your China supply chain?  First, a little perspective.  

Why international commodity prices are up

The China effect.  Simply stated, China’s demand, a major driver of worldwide demand, is up.  The Australian reported “former Morgan Stanley chief economist Stephen Roach, who is among those arguing the China downturn story has been oversold, says that if China meets its 6.7 per cent growth ­target, it will account for 1.2 percentage points of global GDP growth, or roughly 40 per cent of the total.”  So as China’s economy expands and “the problems affecting the state-owned heavy industry are effectively partitioned from the rest of the economy, commodity prices may show further gains.” [1]

Also, The IMF reported in October of 2016 that “the announcement of China’s stimulus package increased metal demand prospects and prices.”[2] China is directing investments toward the steel-hungry construction sector. 

Impact

When oil prices increase, prices for daughter industries like plastics as well as heavy-energy consuming industries like steel—also increase.  Petroleum prices have consistently risen historically and in recent history. 

Bloomberg commodity index nov 2016.png
 
Bloomberg Composite Commodity Index, November 2016 :[3]

As a result, prices for steel products (hot-rolled steel, cold-rolled steel, stainless steel) and plastics (ABS, PVC) are trending up.  These increases are impacting manufacturers everywhere in the world.  It’s not just an issue in China.

2016 commodity price increases.png

Sources:  Steel (in English): http://www.mysteel.net/  Plastic (in Chinese, requires a browser translator): http://www.chemcp.com/

 What to do about it?

Naturally, there’s no guarantee that prices won’t drop again soon. We are not financial advisors or commodity experts.[1] If history is our guide, in general, commodity prices are going up – and it does make sense to be looking at the granular detail. For example, a product which has both cold rolled steel and stainless steel will have different market forces (and percentages) influencing cost. Find out what this means for your product. 

One defence against rising prices is to play offense.  Some buyers are placing full-year blanket orders and making down payments on the entire order in order to lock in material prices (a major driver of cost).  The savings, of course, must offset the carrying costs and risks of inventory. 

This approach may not be an option for many businesses. Typically we see the passing along of increases and decreases as market conditions change. Having a cost breakdown for your product which includes each line item is useful so adjustments are formulaic.

 [1] The information contained on the CMD website, including this article, is for general information purposes only. We make every effort to keep the information on our website current, but accept no liability whatsoever for the content provided.

 

Topics: In The News, Thought Leadership, Operations