Last week’s financial and equity market headlines featured the news that global investors and speculators are bailing-out on commodities amid mounting worries about the slower pace of global manufacturing growth. If you have been following our global tracking of select PMI indices featured in our Quarterly Newsletter, you will have visually noticed this slower overall trend as depicted in the visual attached to this commentary.
Likewise, the precipitous plunge across China’s key stock market also continues, having a potential further impact on China’s major manufacturing sectors as consumers financially stung by severe financial loses retrench in domestic spending.
Commodities such as copper, gold, silver and oil are at their lowest points in years. Global mining firms such as Anglo American, BHP Billiton and Rio Tinto are quickly addressing cost savings by restructuring their commodity businesses that relied on the manufacturing growth and commodity speculation that has occurred in China. Multiple state-owned steel companies across China continue with optimistic output levels despite the evidence of a global surplus and overcapacity condition in steel. Anglo American alone has indicated it would slash upwards of 50,000 jobs over the next several years, amounting to a 35 percent reduction in its current workforce.
Likewise, energy companies are planning additional cost-cutting moves in the light of the sudden drop of oil prices, increased glut of supply and declining trends in global demand for oil.
For the majority of multi-industry supply chain teams, this is ironically good news since lower commodity prices equate to lower input, logistics and cost of goods sold (COGS).
In our Supply Chain Matters 2015 Predictions for Industry and Global Supply Chains (available for complimentary download in our Research Center), we highlighted a continued overall moderation trend for the cost of commodities in 2015 with certain industry specific exceptions. We predicted that dramatically lower oil prices would be the dominating headline driving commodity and pricing trends in 2015, and just past the half-year point, the trend is holding true. Purchasing and commodity teams can therefore anticipate inbound cost savings in the coming year with the usual exceptions related to unforeseen global weather or risk events such as the bird flu outbreak affecting turkey and poultry flocks in the U.S. Midwest and West regions.
However, teams cannot rest easy since the rising value of the U.S. dollar and resulting foreign currency shifts are providing rather significant headwinds to existing financial results for U.S. based manufacturers or those dealing in U.S. dollar dominated revenue flows. In some cases, such headwinds are having as much as a 10 percent or greater negative impact on overall revenues.
While lower commodity related inbound costs will help to offset some of the cost erosion, it may not be enough. Those manufacturers that had significant revenue and profitability expectations by tapping into China’s emerging consumer consumption could soon feel the effect of continuing concern. To provide added evidence, The Wall Street Journal reported today that the Chartered Institute of Procurement and Supply is raising its global risk index to its highest level since 2013. The heightened risk has a lot to do with certain key suppliers in China that may be impacted by the sharp decline in equity and consequent credit markets.
These are the not so good news messages.
Sourcing, procurement and supply chain leadership teams must therefore remain diligent to further opportunities to reduce inbound or supply chain services related costs for at least, the remainder of this year.