Purchasers Benefit From Low Commodity Prices, but High Supply Chain Risks to Dominate 2016
By Business Wire News
Low profitability has undermined commodity producers and brings high risks to the supply chain, according to new analysis released today by IHS Inc. (NYSE:IHS), the leading global source of critical information and insight, at the company’s New Year’s conference.
Overall, the IHS Materials Price Index, a weighted average of the 10 most common commodities, fell 40 percent over 2015, bringing it below the lows of the economic crisis.
“The risk to the supply base for long-term commodities is rising rapidly,” said Jason Kaplan, senior research manager at the IHS Pricing & Purchasing Service. “Low prices have clearly undercut the margins of commodity producers, with many operating at losses.”
“Weak demand and overcapacity have deflated prices in many industries and supply has failed to react quickly to the drop off in price.
“If we look at the nickel industry, 70 percent of producers are losing money, but no one wants to blink first,” Kaplan said. “We are witnessing a replay of the year 2000 with the US steel market. The same situation led to 21 companies going out of business over 18 months.”
“Producers are reacting to this current climate by slashing both capital expenditure and cutting operating expenditure, with inevitable job cuts,” Kaplan said. “How the supply base fully adjusts to the low pricing is still unclear, but the implications for long-term, stable commodity supply are looking increasingly negative.”
Base metals have been depressed by both weak fundamentals and lack of financial interest. While demand for many commodities has weakened, high capital investments means mines have kept running. “Most base metal prices will stay low, as long as no structural change cuts supply,” Kaplan said.
Low oil costs fed through into commodity-grade polymer prices bring down prices. “High input costs have curtailed domestic supply making Europe, but global capacity has lifted imports into the region and undermined prices,” Kaplan said.
Between 2014 and 2015, German wages escalated at a fast rate. “Labor costs will trend upwards broadly in-line with the rate of inflation, but legislation and currency effects will also play a part in some regions,” Kaplan said. “Specifically in German, we anticipate stronger growth in 2016 on the new minimum wage laws and a tight labor market.”
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