In this Supply Chain Matters blog, we revisit forecasts for global commodity prices at the beginning of this year, and what has transpired with about two months remaining in 2021. We do so to provide context for supply management teams of how dramatically different prices have turned out to be, and how the ongoing global supply chain disruptions have contributed to this situation. As businesses begin their sales and operations planning for 2022, there are significant decisions to ponder relative to product demand and supply assumptions. There are further, from our lens, significant risks to assess.

As our readers are aware, our research arm, The Ferrari Consulting and Research Group will dive into a number of key supply chain management technology and business topics during the year. We also research and publish our Annual Predictions for Industry and Global Supply Chains at the beginning each year.

 

A Look Back to 2020

Entering this year, we looked back at the events of 2020.

After the COVID-19 coronavirus made its presence across the globe during the first part of the year, the term unparalleled turned out to be the operative condition with global-wide manufacturing impacted by worker infections, absenteeism and significant material shortages that had to be overcome. Proactive concern for the financial and operational condition of suppliers became evident and visible.

Our sense entering 2021 was that challenges were likely to remain unpredictable depending on the timing of global vaccine availability along with the overall ability of individual economies to bounce back.

We referenced the World Bank Commodity Markets Outlook published in October 2020 which had declared that COVID delivered a significant shock to global commodity markets during 2020 but the impact had varied for different commodities. That was in contrast to the 2008-2009 global wide recession when a broad array of commodities experienced large and persistent declines.

In the all-important global supply management category of energy, prices incurred a steep fall of nearly 60 percent between January and April of 2020 because of precipitous drops in demand but rebounded in the second half of the year. Toward the end of 2020, crude oil prices reportedly remained at one-third lower than their pre-pandemic levels and were projected to average $41 per barrel of Brent Crude oil in 2020. Brent crude closed the year at slightly over $51 per barrel.

The October 2020 forecast had noted an expected rebound in energy prices during 2021 to an average level of $44 per barrel. According to the outlook, demand as reflected by oil consumption was expected to remain below pre-pandemic levels until 2023 with a gradual easing of output restrictions among OPEC producers.

The October 2020 report had further indicated that metal prices recovered more rapidly than expected because of China’s quick recovery in manufacturing and for construction demand. The forecast for this year called for modest increases in metals demand boosted by recovery of the global economy.

However, by December of 2020, metals prices were soaring as speculative investors were piling into futures markets. Noted was that market speculators seemed more concerned with added supply disruptions and thus the run-up in futures.

The World Bank had forecasted that agricultural prices were expected to rise slightly in 2021 following a forecasted 3 percent increase in 2020. Who can forget the tide of pantry loading that swamped food supply networks during the peak of the pandemic last year. One significant stated unknown was the emergence of the La Nina weather pattern which usually incurs cooler than normal ocean temperatures in the Pacific Ocean, leading to dryer and more extreme weather in other parts of the globe. J.P. Morgan indicated in a November 2020 report that this weather pattern evolved quicker and with stronger intensity and categorized this as the “primary supply-side wild card” for agricultural markets entering 2021.

In the general category of raw material, the consensus was that prices would increase 1.2 percent in 2021 after a slight decline in 2020.

 

Current Situation

With global supply network planning now at the mid-point of October, and with two months remaining in the year, commodity indexes have now reached new records with outlooks more uncertain as to plans for 2022.

The Bloomberg Commodity Spot Index, which tracks 23 various energy, metals and crops future contracts rose 1.1 percent earlier this month, topping a previous record that occurred in 2011. Bloomberg reported that this index has surged more than 90 percent since reaching a four-year low in March of 2020.

In the energy category, as we are penning this commentary, the latest quoted price of Brent Crude has closed at over $80 per barrel. The OPEC nations have now indicated an intent to restrict global output in the coming months. The corresponding price of West Texas Intermediate crude oil settled above $80 per barrel for the first time since 2014. Gasoline prices across the U.S. are now above $3 per gallon.

The ongoing global supply network surge has precipitated added fossil fuel demand for transportation needs. Parts of Europe are now facing a potentially significant shortfall of natural gas supplies during the upcoming winter months when demand levels spike. China is also experiencing natural gas and coal supply limitations because of newly imposed restrictions on overall consumption of energy. In the United Kingdom, a shortage of qualified truck drivers and the overhang of Brexit have led to gasoline as well as some food shortages for consumers, amid increasing demand for the UK government to intervene.

For global commodities, prices of copper and aluminum remain at elevated levels because of global supply and demand imbalances while China is now offloading some of its accumulated inventories. Steel prices remain high and can grow higher due to the new energy consumption restrictions now being placed on steel producers along with shortages of metallurgical coal. Supplies of steel or aluminum cans for consumer goods products are in short supply, and when available, costly. Supply Chain Matters recently highlighted a building shortage and exploding prices of raw silicon metal brought about by both the increasing global demand for semiconductors and other commodity needs.

Plastic bottles remain in short supply because of previous winter and summer storms impacting petrochemical facilities located within the U.S. Gulf Coast. A similar shortage of cans is impacting Europe, along with the effects of increased costs.

Agricultural commodity and subsequent food prices are indeed on the rise globally as dry weather has indeed impact harvest seasons within North and South America. The United Nations’ Food and Agriculture food price index rose to its highest level in ten years in September.

 

Additional Perspectives and Insights

Approaching the final two months of 2021, it has become apparent that very-little has aligned across global supply chains. A forecast of modest but manageable commodity price increases for this year have instead resulted in a near doubling of inbound materials price increases, coupled with significant material and component shortages. As we penned in an earlier commentary, explosive increases in global transportation and logistics costs add to eroding product and business margins.

The ongoing surge in energy and metal prices raises more profound concerns as to how commodity market imbalances can fuel additional inflation and dampen a post pandemic economic recovery. Increased speculative buying activity among commodity exchanges helps to add to the fears as are efforts among businesses to consciously stock more critical commodities than during normal times.

In turn, more and more businesses are electing to increase prices of products in order to either maintain or increase product margins. Some are electing a strategy to both increase product prices and attempt to offset added costs by other means.

The growing risk is that not only will rising material costs fuel added inflation, but that industry supply chains and respective transportation services as a whole will imperil a post pandemic economic recovery. Needs for a new urgency to supply chain sustainability in the light of increased global warming add to a basis for rethinking current practices.

Indeed, as businesses assess sales and operations planning for 2022 and beyond, there are significant decisions to ponder relative to product demand and supply assumptions. There are further, from our lens, significant risks to assess. Risk areas included true assessments of product demand, significant needs to rethink global supply network sourcing strategies in a more weighted context for supply network resiliency and ESR.

These are decisions that supply management leaders should not address alone, they require broader cross-functional supply chain management alignment along with business wide and C-Suite perspectives as to implications and tradeoffs.

A further question, how much added inbound supply and operational costs to assume in the coming years, and what that will imply in product and business plans. There are further ramifications for added supply chain cost reductions when some organizations can least afford them in terms of added implications to people and technology needs.

We would add an additional risk, that retailers and manufacturers have actually procured way more inventory than actual market demand, the manifestation of the bullwhip effect on a much broader scale. More on that topic in a forthcoming editorial.

Consumers have generally remained loyal to brands and products during the pandemic.  That loyalty can be fleeting faced with significant higher prices and ongoing delayed deliveries for those products.

There may well be compelling time pressures among businesses and their supply chain management operational groups to focus solely on making the upcoming final quarter of 2021 a successful one in revenues and profitability. Our takeaway is that dedicating time on this quarter, without investing adequate time on strategic, tactical and operational planning encompassing the coming 1-2 years will prove to be more costly.

Supply chains are far from reaching the termed post pandemic new normal.

From our lens, significant work remains in assessing current sourcing, logistics and transportation strategies in the light of rapidly changing markets and business conditions. Planning is now essential as is the candid questioning and rethinking of existing material sourcing strategies. The notions of the lowest cost, highest service availability supply chain have far different meaning in these new dimensions of supply chain risk mitigation.

 

Bob Ferrari

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