Executive Briefings

Low Prices Undercut Margins of Commodity Producers, Negatively Affect Supply Chains, Report Finds

Low profitability has undermined commodity producers and brings high risks to the supply chain, according to IHS Inc.

Low Prices Undercut Margins of Commodity Producers, Negatively Affect Supply Chains, Report Finds

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 U.S. 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.

Source: IHS

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 U.S. 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.

Source: IHS

Low Prices Undercut Margins of Commodity Producers, Negatively Affect Supply Chains, Report Finds