While industry supply chain teams work on achieving various 2015 year-end strategic, tactical, and operational line-of-business business and supply chain focused performance objectives, this is the opportunity for Supply Chain Matters to reflect on our 2015 Predictions for Industry and Global Supply Chains that we published in December of 2014.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Thus, not only do we publish our annualized predictions, but every year in November, look-back and score the predictions that we published for the year. After we conclude the self-rating process, we will then unveil our 2016 predictions for the upcoming year.
As has been our custom, our scoring process will be based on a four point scale. Four will be the highest score, an indicator that we totally nailed the prediction. One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.
But now is the time to look back and reflect on what we previously predicted and what actually occurred in 2015.
2015 Prediction One: A More Optimistic Global Economic Growth With Usual Caveats and Uncertainties
Self-Rating: 3.0 (Max Score 4.0)
Our prediction echoed an optimistic economic outlook entering 2015 with continued cautions and unknowns for industry supply chains. Bright spots were expected to be the United States and Mexico, with some slight moderation for China. As the year progressed, the caveats and uncertainties became evident with 2015 now expected to close at a far more moderate growth rate, primarily as a result of declining growth among emerging economies.
Entering 2015, the International Monetary Fund (IMF) had predicted 3.8 percent in overall 2015 global growth vs. an actual 3.3 percent growth in 2014. However, at mid-year, the IMF revised that forecast downward. In its October 2015 forecast, the IMF had adjusted global growth expectations to 3.1 percent, slightly below that of 2014.
Growth within Advanced Economies, originally projected to be 2.3 percent entering the year, have now been scaled back to 2.0 percent. In the first-half of 2015, growth of advanced economies was reported as modest, with growth in the United States weaker than expected despite a strong second quarter. The Eurozone sector has bounced back with growth accelerated by foreign currency advantage and added confidence. The IMF’s October forecast now indicates a six-tenths growth rate for the Eurozone over 2014.
Growth among Emerging Markets and Developing Economies, originally projected to be 5.0 percent entering the year, was scaled back to 4.0 percent by October 2015. As many are now aware, the most significant concern focuses on China, which entering the year was forecasted to grow 7.1 percent. By October, the China forecast had been reduced to 6.8 percent. While Latin America growth was expected to be fueled by Brazil and Mexico, Brazil is now forecasted as a 3 percent decline in growth was Mexico is forecasted to end the year at 2.3 percent growth, two-tenths higher than 2014.
The J.P. Morgan Global Manufacturing PMI Index, a composite index of global supply chain and production activity entered 2015 at a value of 51.5. As of the close of Q3, the value had declined to 50.3, just slightly above the 50 level of overall contraction. The average for the nine months ending in September was 51.2. Rather than a growth scenario, global supply chain activity has generally been on a downward trend. Once more, forward indicators such as New Orders, Export Orders and Employment Growth are all reflecting continued moderation.
Global currency shifts have turned out to be a significant challenge for both individual countries and for multiple industry supply chains. The most significant for industry supply chains was China’s sudden devaluation of its currency in August. Growth and profitability plans predicated on an emphasis toward emerging markets, particularly China, had to modified. Sales and Operations (S&OP) teams remain constantly challenged with adjusting individual region and often individual country resource plans.
2015 Prediction Two: General Moderation and Reduction of Commodity Costs with Certain Exceptions
Self-Rating: 3.8 (Max Score 4.0)
Our prediction for this year focused on an overall moderation trend for the cost of inbound commodities and consequent supply chain raw materials and components. We noted that lower oil prices would be the biggest headline driving commodity pricing trends in 2015 and that turned out to be exactly what occurred.
In its November forecast, The International Energy Agency (IEA) indicated that oil prices are likely to remain low over the next five years because of excess supply and falling demand in developed countries. Further reported was that oil prices have now plummeted more than 50 percent since the middle of 2014, closing at $43.95 per barrel as of November 9th. Further, in its semiannual forecast, The Organization for Economic Cooperation and Development (OECD) indicated in November that lower oil prices and falling unemployment will bolster economic growth in the 34 nation group of developed economies, helping to offset the impact of a slowdown in emerging economies.
As of early November, the Standard and Poor’s GSCI Index of broad based commodities was down 22.5 percent year-to-date. Highlights included industrial metals, agricultural, livestock and grains all down in double-digit ranges. The precipitous decline in China’s import and export manufacturing sector has had a dramatic impact in fostering oversupply in industrial commodities and associated prices. Commodities such as copper, gold, silver and steel remain at low price points with global excess inventories.
Global weather events remained an important driver of agricultural prices in 2015 with severe drought conditions in the United States and certain Latin American countries adding to the exception to lower commodity price trends in 2015.
In our next posting in our look back on 2015, we will review Predictions Three and Four.
In the meantime, please share your own observations and insights regarding our initial two predictions related to global supply chain activity and commodity pricing trends.
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