Executive Briefings

Commodity Price Volatility - Learn to Live with It!

The meteoric growth of emerging economies, in particular China, has had a dramatic impact on the price of raw materials and energy. With infrastructure construction in China continuing at breakneck pace, the world's supplies of steel, concrete, copper and other commodities are diverted and prices have risen dramatically as a result. China will almost certainly continue its spectacular building spree for many years (probably decades) to come, and is being joined by India, Southeast Asia, and other fast-growing regions.

Fuel prices are even more volatile, given the political instability in so many oil-producing regions.

Price volatility does not apply just to raw materials. In many cases intermediate materials (e.g. titanium sponge or tantalum powder) or components (e.g. memory chips) can be constrained by the production capacity, which can be overwhelmed during periods of high demand. For these industries, it can take a year or two to bring significant new capacity online. When these shortages occur, prices skyrocket. All too often it seems that just as demand cools off, the suppliers have just managed to create significant new capacity which now far exceeds demand, and the prices drop like a rock.

The bottom line is that sourcing personnel will have to learn to deal with commodity price volatility for many decades. That is why good hedging strategies are becoming an increasingly important element in the sourcing professional's arsenal of methods and skills.

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The meteoric growth of emerging economies, in particular China, has had a dramatic impact on the price of raw materials and energy. With infrastructure construction in China continuing at breakneck pace, the world's supplies of steel, concrete, copper and other commodities are diverted and prices have risen dramatically as a result. China will almost certainly continue its spectacular building spree for many years (probably decades) to come, and is being joined by India, Southeast Asia, and other fast-growing regions.

Fuel prices are even more volatile, given the political instability in so many oil-producing regions.

Price volatility does not apply just to raw materials. In many cases intermediate materials (e.g. titanium sponge or tantalum powder) or components (e.g. memory chips) can be constrained by the production capacity, which can be overwhelmed during periods of high demand. For these industries, it can take a year or two to bring significant new capacity online. When these shortages occur, prices skyrocket. All too often it seems that just as demand cools off, the suppliers have just managed to create significant new capacity which now far exceeds demand, and the prices drop like a rock.

The bottom line is that sourcing personnel will have to learn to deal with commodity price volatility for many decades. That is why good hedging strategies are becoming an increasingly important element in the sourcing professional's arsenal of methods and skills.

Read Full Article