Tag Archives: oil prices

Economy predictions and interest rate hikes: Is it a buyer’s or seller’s market?

Setting your strategy through 2016

In today’s economic environment, how should procurement professionals look at the market?

Let’s review the forecasts. Most economists are forecasting growth through 2015 and accelerated growth through 2016 with leading forecasters predicting that the world economy will grow between 2.8 and 3.0%. Looking at the October 2014 forecast of the International Monetary Fund (IMF), world growth was measured at 3.3% for 2014. There is little doubt that the US is leading the way with strong performance and lower unemployment numbers. However, while Janet Yellen sees “some of the headwinds that have been holding the economy back are beginning to recede” and sees a possible interest rate hike in as a sign the economy is healthy, what impact will a possible June interest rate increase have on the tricky financial supply chain?

As I review these numbers, consider the decline in oil pricing, increase in consumer spending and predictions of a strong global economy, I am placing my bet that the buyer’s market of cost containment, available supplies and increasing volumes back to pre-recession levels is here for a while, even if interest rates start to raise this summer.

Buyer’s market is great news as procurement professionals prepare plans for 2016. It’s always a challenge and worry when setting standards and budgets, but it looks like buyers can go forward with a great deal of confidence. Understanding the macro and microeconomics is an essential skill required by any purchasing professional.

Go forward with some confidence and capitalize on the buyer’s market as long as you can.

Make hay while the sun shines.

Energy Prices in Flux

Where are energy prices going? We’re not really sure.  A recent forecast reports conflicting information.  U.S. crude plunged toward negative daily territory as the Energy Information Administration revealed worse than expected crude and refined products supply figures, signaling a strong bearish outlook.  The only bullish sign for oil was that supplies at Cushing, Oklahoma, dropped to the lowest level since October 2009.
Oil tycoon T. Boone Pickens, speaking at the ISM 2014 Annual Conference, suggested that new drilling technologies have radically changed the capacity of the U.S. to produce oil and gas over the long haul. He also said conversion from gasoline to natural gas in transportation fleets will come quicker than anyone else is predicting. He predicted those changes could keep domestic energy prices under control for the foreseeable future.

Shock proofed supply chain?

Most Americans probably couldn’t locate Crimea without the help of Google Earth. (It’s the peninsula that juts south from the northern coast of the Black Sea.) Nevertheless, the actions of the Russian army in and around Crimea are sending shock waves through some key commodity markets, including oil. Here’s the Washington Post coverage of the story.

Have you felt any effects from the spikes in market prices? Even if you have not, this is another reminder that your supply chains likely have connections around the world that may not be obvious from your first tier suppliers. It’s good practice to map your supply chains and analyze scenarios for disruptions that could happen at any moment.

While the chances of any individual incident might be very small, there are so many potential disruptions that it is quite likely something will go wrong sometime. Smart supply managers build risk management strategies into their planning to accommodate them.

Inflation Starts Here — or There

A very slow economic recovery in the U.S., and the associated headache of continuing high unemployment have generally kept inflation at bay over the last year. However, the recent spike in fuel prices and in some commodity categories have been warning us that the buyer’s market may be coming to an end.

Where will inflation start? It already has, of course, in most forms of transportation. The New York Times says in this article that you can add China to that list.

According to the Times‘ data, minimum wages in Beijing have gone up about 20% in the last year when calculated in terms of U.S. dollars — partly due to local  pressure and partly due to the rise in value of the renminbi. Overall the official inflation rate is listed as just 5%, although that is likely to be a low estimate.

This news brings more caution about sourcing in China — although the real key to success there has never been to race in, hoping for a quick fix to cut costs. And it’s a reminder to check every category you are buying for advance signs of price pressure.

2011 starts with manufacturing momentum

Yesterday’s ISM Manufacturing Survey reported economic activity in the manufacturing sector expanded in December for the 17th consecutive month. Norbert Ore, chair of the ISM manufacturing survey committee said, “the average PMI for January through December (57.3 percent) corresponds to a 5.1 percent increase in real gross domestic product (GDP).” That’s based on the historical relationship between the manufacturing index and the GDP.

The story for procurement professionals in the report is that manufacturers noted price increases in 23 different categories of commodities. Metals, chemicals, fuel, and grains were all there. Since the whole world seems to be shaking off the recession, upward price pressure is likely to continue for the foreseeable future.

Oil seems to be a particularly worrisome category. According to the Wall Street Journal, Goldman Sachs is predicting crude oil prices up to a $100 per barrel again this year. However, the Journal also says OPEC has a self-interest in keeping price hikes moderate because the giant spike in 2008 was one of the factors that killed the global economy. According to the Journal, that might have been a short-term windfall for OPEC, but the more stable prices through 2010 were really a better long-term deal for oil producing countries. And consumers as well. If oil prices cannot be contained and other commodities spike as well, the slow growth out of recession could still be in jeopardy.

 

More Inflation Cautions

The Institute of Supply Management’s Purchasing Managers Index (PMI) for October that was reported today made its biggest jump since 2006. — from 52.6 in September to 55.7 last month. (See the news release.) That’s good news for the economy as a whole, but it bolsters our cautions that pressures on prices are likely to increase faster than the pace of economic recovery over the next few months.

The PMI is considered a leading indicator of economic business conditions. Purchasing managers are already reporting price increases in 11 commodity categories. Furthermore, inventories have been contracting for 42 consecutive months. Those facts suggest that price pressure is likely to go up.

Suppliers may be trying to recover from their losses over the last year and perhaps betting that shortages might drive prices higher quickly. It’s also possible that tight credit is still limiting manufacturers to add production capacity. Whatever the reason, buyers must remain diligent in their efforts to contain cost.  As companies recover and work to improve their bottom line, cost containment will be the core focus in managing suppliers in 2010. It will be necessary for buyers to review their tools for containing costs and develop new methods for dealing with price escalation.

In southeast Michigan we see the same kind of pressures on prices, but there was also a drop in the local PMI, released by the Institute of Supply Management – Southeast Michigan.  The ISM-SEM reported that its October purchasing managers index was 51.3, a drop of more than 10 points, but still in the range that demonstrates some modest improvement in economic conditions. The three-month trend of the index also remains positive.

We likely had an uptick in September as a trailing result of the ‘Cash for Clunkers’ automotive incentives. The October composite figure shows a slight cooling off, but looking deeper we see local purchasing managers reporting higher prices in a number of categories. That suggests there is finally demand building that can drive new growth.

The drop in the southeast Michigan index might suggest a note of caution about the national figure, too, because Michigan’s PMI often leads the index for the rest of the country. October’s big jump in the national PMI might be followed by a lower index next month, matching Michigan’s pattern. With so many uncertainties, we shouldn’t be surprised if the recovery has some fits and starts. Overall the outlook is still positive.”

$100 Per Barrel Oil

They may only be bumping up against it now, but oil prices will soon hit and exceed $100 per barrel, and prices aren’t likely to drop substantially for the forseeable future. The reason for that is summed up in two countries: China and India.

Increased competition for the scarce oil from developing nations such as India and China are likely to keep the pressure on the price of oil for some time. Smart buyers who have watched the price go up have already created category strategies and relationships with their supply chain to manage the higher costs. Those who have not may be forced to look for strategic alternatives in energy and some raw materials in order to survive.

The $100 benchmark will significantly impact the Michigan, U.S. and global economies. The triple-digit price has a huge psychological impact that will affect consumers as well as every buyer throughout the supply chains that create consumer products. If they haven’t paid enough attention to the rising cost of fuel, the $100 mark is a loud wakeup call.

Buyers in every industry will be making cost containment an even higher priority than it has been, because oil provides more than just energy and fuel for shipping products. Industrial buyers will be encountering significantly higher costs for freight, plastics, chemicals, steel and travel.