The Supply Chain Matters blog continues with our series of blogs focused on assisting industry supply chain and sales and operations planning teams in their planning for the second half of 2021.
Previous commentaries that have been published in this series are:
In this commentary we focus on the forecasts for global-wide direct materials supply management at the start of the year compared to what the situation looks like at the mid-point of the year.
Global Supply Management Demand and Supply Imbalance
In our Ferrari Research 2021 Predictions Research Advisory published in January, we referred to The World Bank Commodity Markets Outlook published in October 2020. That outlook reinforced that supply shocks encountered in 2020 as a consequence of the global-wide COVID-19 pandemic would spill over to 2021 but would vary for different commodities. That was in contrast to the 2008-2009 global-wide recession when a broad array of commodities and materials experienced large and persistent declines. There were the obvious expressed uncertainties regarding the availability of vaccines and how quickly certain developed and developing country economies would eventually bounce back.
The April 2021 update to this index reported that prices continued their recovery in the first quarter of 2021 with four-fifths of commodities above their pre-pandemic levels, and in some cases, considerably above those levels. The same notions could likely be stated as the second quarter ends.
Reporting by The Wall Street Journal in early June observed:
“The world hasn’t seen such across-the-board commodity-price increases since the beginning of the global financial crisis and before that, the 1970’s. Lumber, iron ore and copper have hit records. Corn, soybeans and wheat have jumped to their highest levels in eight years.”
Energy prices incurred a steep fall in the first-half of 2020 due to a precipitous drop in global demand but rebounded in the second half. Entering this year, the consensus view reflected was that crude oil prices in 2021 would average $44 per barrel and remain at pre-pandemic levels until 2023.
The April outlook indicated that crude oil prices saw their fastest recovery from a price collapse on-record and reached a high of nearly $70 per barrel in mid-March before dropping back. Looking ahead the April report forecasts that energy prices will increase to an average of $56 per barrel in 2021, more than one-third higher than 2020. The latest forecast indicates that the average price rise has occurred despite global demand being an estimated 5 percent below 2019 levels. According to the report, higher prices of energy stem from a higher-than-expected cutback in global production cuts among OPEC and its partners.
As we are all aware, the cost of energy is a crucial factor for global supply chain activity levels and in operating costs, and the ongoing price increases were likely not factored in original operating budgets for this year. Now, they will have to be factored in the more active second half of the year. A further consideration are fuel-based surcharges that carriers tend to impose om shippers and importers.
With China continuing to account for upwards of half of global demand for metals, The October World Bank forecast had indicated modest price increases for metals under the assumption that China had already recovered from the pandemic early in 2020. However, by December 2020, pricing for metals were spiking reportedly because speculative investors were piling into futures markets. By the end of 2020, copper had risen to an eight year high, while aluminum and zinc prices increased 15 percent.
The April forecast noted prices for bare metals and ore had risen by 16 percent in the first quarter, with robust demand levels occurring from both advanced and emerging market economies. Copper prices have risen as a result of supply disruptions within Chile and Peru.
As a result, metal prices are forecasted to rise by nearly 30 percent in 2021, before dropping back in 2022.
China itself has of late been quite focal on the increasing prices for metals with factory gate prices reaching 13-year highs. Reports have indicated that some Chinese factory owners have been forced to cut back on operations to offset losses incurred from higher inbound material costs. In mid-June, the government announced that the country would begin to sell industrial metals from its state stockpiles, reportedly copper, aluminum and zinc, in an effort to quell the sharp rise in global metal prices.
Entering this year, agricultural prices were forecasted to rise slightly following an anticipated 3 percent decline in 2020. That is clearly not been the case. According to the World Bank, most agricultural commodity prices saw substantial increases driven by strong demand for some commodities along with supply shortfalls and crop limitations with South America. The agency now anticipates price increases of 14 percent this year, and where there are specific supply shortfalls, price increases could be even steeper.
A good portion of large, branded food producers are raising prices on grocery items while restaurants challenged by both increased food and labor prices are reluctantly rising food menu prices. Unilever’s CEO Alan Jope indicated to investors recently that: “We’re in a period of unprecedented commodity inflation.” Our readers may have read of multiple media reports of shortages of certain required products at outlets, a shortage of tin cans hampering the production of Italian cooking tomatoes, shortages of beer and soda cans and the list goes on. Such headlines remind us of what transpired last year during the pandemic’s supply shocks, the difference now is an explosion of market demand.
Impacts for the Second Half of 2021
It is therefore obvious at this point that multi-industry supply chains continue to be impacted by various double-digit increases in inbound material costs. As Supply Chain Matters has noted in prior commentary, these factors are eroding product margins and more and more companies to have to reluctantly raise prices of end goods. The ongoing explosion in ocean container transport is a further concerning factor bordering on some perception of price gauging. All of this, in-turn, is raising increased concerns among global economists for broader price inflation.
Decisions by major government policy makers to stimulate their economies for full production obviously adds to the ongoing demand and supply imbalances, and for growing supply and labor shortages. Add to this the unprecedented disruptions occurring in global shipping and transportation networks in the scenario of the perfect storm of global supply chain choke points is not far-fetched.
With governments now becoming more concerned about these factors and with the U.S. Federal Reserve’s recent indications to financial markets to expect interest rate increase by 2023, there remains a lot of concern.
For individual supply management and procurement teams, the second half of 2021 will be especially challenging having to manage this explosion of inbound costs and ongoing cascading supply shortfalls.
What was concerning to this Editor was recent survey data published by Hackett Group indicating that the overall days to pay suppliers is creeping back up to 2020 COVID levels. Data indicated that whereas for fiscal 2020, businesses averaged 62 days on average to pay suppliers, large U.S. companies are now averaging 58 days in payment to suppliers. On perhaps the extreme side, consumer snacks and packed goods provider Mondelez reportedly is taking upwards of 130 days to pay suppliers, according to Hackett data. While businesses are likely trying to mitigate rising working capital costs, passing the burden to suppliers runs the risk for further disruption and supply shortfalls. Conversely, some businesses have taken the approach to actively collaborate with suppliers on enhanced receivables financing or longer-term supply contracts.
With economic and market forecast data pointing to robust levels of product demand continuing for the remainder of this year, the challenges of exploding double-digit inbound material costs as well as continuing product shortages make for added difficult decisions in the coming weeks. The needs for tight alignment among lines-of business, product and supply chain management as well as business sales and operations teams has never been as important as it is today.
Whereas last year, the primary emphasis was restoring product demand and supply networks, the challenge has now rapidly shifted into meeting customer product fulfillment expectations while insuring that overall financial objectives are met. More tan ever, broader cross-functional and line-of-business alignment on strategies and tactical plans is essential as are assuring the timeliest information related to inbound material costs, commodity trending and market-based analytics. As noted in our prior commentary in this series, a more dedicated and tighter oversight of contracted ocean transport and logistics services contracts is equally essential since market forces have clearly turned toward seller market dynamics.
Contingency planning is an obvious must and in some cases is bolder thinking. Teams will need to continue to educate and inform senior management as to ongoing supply management dynamics and their implications. By our lens, management decisions cannot not be one-dimensional in terms of impact. There will be need for trade-offs.
By no stretch of the imagination is this business as usual in industry supply chain management circles as the second half of this year unfolds.
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