How would a sudden jump in oil prices or shipping rates impact your supply chain? Our white paper has looked at ways to manage the risks posed by commodity price volatility.
Companies are increasingly sourcing raw materials from disparate geographies in their efforts to reduce costs, maintain margins and stay that crucial step ahead of the competition.
However, as global supply chains become increasingly long and complicated the exposure to risk in those supply chains increases too.
What does this commodity price risk exposure mean to your business, and how do you mitigate the risks before they manifest themselves into a weakened business model or irrecoverable damages?
A recent Thomson Reuters survey, featured in the newly released supply chain white paper on managing price risks in the supply chain, reveals that raw material price volatility is the most commonly sited challenge in global supply chains.
Commodity price volatility
Global commodity prices have endured shocks since the 1970s, but the speed and range of that volatility has changed dramatically.
Thomson Reuters new supply chain white paper reveals that there are three main factors driving commodity price volatility:
- Shipping costs.
- Currency fluctuations, often accounting for as much as 10 to 15 percent of price volatility.
- Supply and demand dynamics, sometimes accounting for up to 90 percent of price fluctuations.
There are, of course, other factors, such as disruptions to supply, that can have a significant knock-on effect on prices.
Watch video — Thomson Reuters Supply Chain Management Tools and Analysis
Geoffrey Smith, Head of Cross Asset Research at Thomson Reuters, recently analyzed a chart mapping iron ore prices and freight rates over the past eight years.
He said: “On this particular chart, the iron ore freight rates on one particular route from Brazil to China varied between 10 and 55 percent on prices at the start of a given period, while on another shorter route from Australia to China freight rates saw variations between 5 and 25 percent on prices at the start of a given period.”
Such pronounced fluctuations clearly make it very difficult for supply chain professionals to make accurate price forecasts.
Having global supply chains increases the exposure to currency risk.
This risk has traditionally been managed by corporate treasury departments using sophisticated forecasting tools and hedging strategies, but increased collaboration between the different parties involved in most supply chains is changing this.
Watch video — How does Thomson Reuters help you manage price volatility in your supply chain?
Leigh Henson, Global Head of Commodities, Customer and Supply Chain Risk at Thomson Reuters, said: “Supply chain professionals were not previously concerned about areas like hedging, which have fallen to treasury in the past.
In the modern supply chain, there is no room for the silo thinking of the past. Collaboration between all departments is necessary to manage the supply chain effectively.”
Supply and demand dynamics
Despite being the biggest driver of commodity price fluctuations, supply and demand dynamics is often less well managed than, for example, currency movements.
This is often due to a lack of access to reliable data, forecasts and in-depth analysis.
The number of factors that affect the global supply and demand balance, and therefore the prices of different raw materials, is staggering, and includes, among others, pervasive issues such as terrorism, political instability, natural disasters and economic cycles.
The oil price is affected by both physical supply and financial trading — traders who never actually take possession of the oil itself, but buy and sell oil futures for financial gain only, thus manipulating the price.
In agriculture markets, a wide range of factors can influence supply and demand, including weather, natural disasters, population growth, government policy, transportation and changing diets.
- Precious and industrial metals
Who could have predicted the strong rally in the gold market in the wake of the Brexit vote in June 2016? Staying on top of ever-changing market conditions that drive commodity price volatility is no easy task.
Managing supply chain risk
These examples demonstrate that, across the board, procurement and supply chain professionals are faced with ever-changing market conditions that can play havoc with even the best pricing forecasts.
Thomson Reuters new white paper on Price Management in the Supply Chain gives you the knowledge and tools you need to control commodity price volatility to manage the risk in your supply chain.