We alert our sourcing and procurement focused Supply Chain Matters and other readers to two rather important developments that should provide a positive offset to increased commodity costs, particularly those industry participants that depend on market-driven commodities.
The first was the revelation by business media earlier this week that JP Morgan Chase, one of the largest U.S. financial institutions announced that it is exciting the physical commodities business. The bank joins rivals Goldman Sachs and Morgan Stanley who are also seeking an exit from this business. The moves come in the wake of increased scrutiny by regulators regarding the market-moving power of these large global financial firms. In previous years, large banks were barred from ownership of physical assets but bank de-regulation of the 1990’s and subsequent loosening of provisions in the early 2000’s on the part of the Federal Reserve allowed the practices of holding physical assets to continue. The U.S. Federal Reserve is now reviewing its decade-old policy and that is prompting these latest developments.
In its reporting, the Wall Street Journal noted that in 2010, JP Morgan amassed copper stockpile of more than 175,000 tons exceeding $1 billion in value, and accounting for almost half of all the copper stored in London warehouses. The WSJ further reported the JP Morgan is the biggest bank involved in natural gas storage. Further noted was that such practices allowed banks to review market supply and demand trends and consequently add considerable profits for clients and these banks. Commodity markets have further collapsed across multiple industry segments making these practices less profitable for these mega financial institutions.
The other important development came with today’s business headlines that an alleged cartel in the price of potash is unraveling. According to the WSJ, this upheaval began after Russian based producer Uralkali announced it was pulling out of a sales partnership with Belarus, “the linchpin of one of two groups in a global cartel commanding two-thirds of a nearly $22 billion market for the fertilizer ingredient.” Global investors are now bailing from potash mining stocks in fear of falling prices and more supply added to the market. This news however reflects positively on manufacturers dependent on food related commodities. The WSJ quoted a Toronto based commodities fund manager who indicated: “It is astonishing… It’s like Saudi Arabia dropping out of OPEC.” As the remaining market producers jockey for market positioning, buyers should reap the rewards of lower pricing, at least for the short-term horizon.
The latest series of earnings announcements from major industry players have generally reflected lower inbound costs that help contribute contributions to lower material costs and added profitability. Supply Chain Matters calls attention to these two important developments as contributing to the trend of lower commodity costs. Procurement executives have often expressed frustration regarding wide-scale speculation in commodity markets that have fueled increased inbound costs and consequent added pressures to take out supply chain related costs in other areas. Market trends now appear more positive toward a rationalization of these outside forces.
Hopefully, these developments and trends will continue and procurement teams can turn their attention to other strategic needs.