1st Quarter 2009 Commodities Update
CHARLOTTE, NC, February 19, 2009 – United Sourcing Alliance actively monitors market pricing to ensure our supplier partners remain competitive with market fluctuations. Below you’ll find our latest update on key commodities and currencies.
ISM Manufacturing Price Index – The January Manufacturing ISM Report on Business has reported that the manufacturing sector continues to show significant signs of contraction. The Purchasing Managers Index (PMI) is reporting the 12th consecutive month of contraction with an index reading of 35.6%. An index below 50% indicates a slowing in manufacturing while an index below 41% generally indicates a slowing in the overall economy. As you can see at 35.6% we are experiencing contraction in both. In January only 2 of the 18 industries reported growth in new orders: Textiles and Food-Beverage-Tobacco. Only 3 of the 18 industries reported growth in production for the month of January: Textiles, Food-Beverage-Tobacco, and Petroleum & Coal Products.
The ISM Price Index came in at 29% in January indicating that most manufacturers are paying less on the average compared to previous months. Of those participating in the ISM report: 12% reported paying higher prices, 54% reported paying lower prices, and 34% reported paying the same. The only area reporting higher prices in January was Electrical Components. Lower prices are being reported for: Aluminum Products, Copper, Diesel Fuel, Oil, Gasoline, Natural Gas, Stainless Steel Products, Steel, and Polyethylene. A couple, Polypropylene and Corrugated, were reported as both up & down.
In a complete reversal from our last update, pricing for polyethylene products have plummeted in recent months. Analysts simply point to the dramatic declines in demand and feedstock as the primary drivers for these reductions.
As you can see from the chart below, after a high of $1.02 per lb in July of 2008 prices had crashed down to almost half of that number by December of 2008 at $0.54 per pound. A slight rebound in January to $0.57 will likely not be sustained with the second quarter forecast coming in at $0.55 per pound. And over the next 12 months you are likely to find prices fairly stable.
After pushing through the increase in linerboard back in August and establishing an all time high of $655 per ton, paper producers are finding a tough go of it and have had 2 reductions in as many months. However the decreases are moving at a much slower pace than the increases. In both December and January we saw $10 per ton reductions in the linerboard indexes bringing the current number in at $635 per ton according to Pulp & Paper. The box makers are struggling to keep their heads above water with demand and box shipments significantly off. Citing the unprecedented economic downturn and the inability to restructure it’s debt due to frozen credit markets, Smurfit-Stone recently filed for bankruptcy protection under chapter 11. They immediately sent a price release to customers saying it would be business as usual and they would not miss shipments.
In a recent survey steel buyers are reporting that the down turn in demand that started back in August of 2008 will likely continue into March or April of 2009. Prices are down an average of 10% with cold rolled sheets down to an average of $607 per ton in January compared to $667 in December. The steel markets are very quiet with the only uptick in orders reported for a small number of distributors that are filling in some inventory gaps. Industry analysts are predicting a bottoming out in early second quarter in both demand and prices. Prior to then it is likely you will see another decrease of 4% to 5% before upward movement starts. And even when the rebound starts it is most likely that the increases will be very modest in both demand and pricing.
A significant downturn in demand from the construction and automotive industries as well as a spread of the US recession to several emerging nations makes for a very uncertain chemical market. But it safe to assume that the price gains that most producers enjoyed through most of 2008 will be given back to end users. A sharp decrease in pricing was reported in the fourth quarter and that trend will likely continue into 2009. The bottom fell out for several basic chemicals such as: Toluene – down 42% from July highs, Propylene – down 40% from a July high, Ethylene – down 45% from a July high, Benzene – down 72% from a September high.
Both commodity and specialty chemical demand has dropped dramatically, and the overall chemical business downturn will continue into 2009. Economists and industry analysts agree that the industry could experience a $10 billion decrease in shipments for fiscal year 2009. Many of the chemicals you use finished 2008 at lower prices than where they started in 2007.
Looking back on 2008 we saw a very slight increase of 0.7% in consumption driven mainly by nationwide below average temperatures. While 2009 projections continue to show modest increases in the residential sector these will be more than offset with a projected 3% reduction in the industrial sector. As expected this is attributed to the overall economic slowdown. On the flip side production for 2008 was up almost 6% with another increase projected for 2009 of 0.7%.
While the average spot price in 2008 was $9.13/Mcf, the average for December 2008 was only at $5.99/Mcf. A significant drop of 34% compared to the annual average. These lower prices for natural gas will continue into 2009 with a projected average of $5.78 for the year. Prices are expected to rebound in 2010 to a $6.63/Mcf average as the economy bounces back. But still well below the levels we experienced in 2008.
As of 2/5/09 the overall US Dollar Index stands at 86.06, a 19% increase from the June 2008 index of 72.39. Below you will find the current US dollar exchange rates versus some key currencies and the YTD change alongside the yearend 2008 numbers. The dollar had a tremendous run in 2008 as the world economies slowed. Although we are generally seeing more strength again this year, the long term impact of our massive stimulus packages and increased debt will in time weaken the dollar as inflation becomes a problem when the recovery does arrive.
|12/31 Rate/US$||’08 YTD chg||2/16 Rate/US$||’09 YTD chng|
A positive year-to-date change means the dollar has strengthened against the currency for this year and will purchase more of the currency or products of that country. Based on the current move, we should all look for opportunities to negotiate better pricing on imports. Know the numbers and use them to your advantage.
In our most recent update we reported to you that Cost Analysts had joined Untied Sourcing Alliance’s supplier portfolio as a provider of Telecom and Utility audit services, and was engaged with a number of clients. Since that time these audits have been concluded and in every case errors and overcharges were uncovered. These are indeed lost dollars and there is no cost to you to have a very thorough audit performed by experts in the field. Their work is very detailed and impressive, and in the end you will receive a very comprehensive report of their findings. If you or someone in your financial group has not had a conversation with Cost Analysts we highly recommend it.
Our Office Max contract has been enhanced and renewed for 5 more years. The master core list, now with 350 items, had an overall price decrease of 3%. Our new non contract pricing is 10% better than before, averaging 50% off list. Don’t forget to use the local core list to get deep discounts on frequently purchased items specific to your company.
We have just completed another corrugated RFP for a new client headquartered in the Hickory area. Again the results were dramatic with a savings around 15% on an annual spend over $2 million. Linerboard markets are taking a turn down and most box manufacturers are looking to gain and protect their market share, so now is a very good time to let us work with you on a RFP event. We can conduct the event on your behalf and report back any potential savings for your organization. Likewise the RFP methodology and process of data collection, discovery, analysis and execution can apply to any number of product areas. Call if you’d like more details.
Here To Help
Is it time to tap the expertise of our suppliers to come in and look for additional savings? So many have resources we seldom tap. We’ll be attending the Fastenal Solutions Cost Reduction Seminar on February 26th in Spartanburg, SC. Other suppliers can help with inventory management; order processing, supplier consolidation, crib crawls or facility audits. Give it a look, they want to help.
Times are tough and will likely to continue that way for a while. What are we doing at United Sourcing Alliance in this environment? Three things:
- We’re growing our range of services.
- We’re growing our supplier base in both categories and companies. Last year we added three new suppliers and one additional category. We are presently in negotiations with three additional supplier partners all with an eye toward increased options and flexibility.
- We’re growing our sales team.
We do this in an effort to strengthen our offering to you, our clients. Interest in our services has picked up since mid-January, perhaps a sign that companies see these tough times lasting. Stay positive, support each other and have comfort in the one thing all recessions have in common – they come to an end. Brighter days are ahead; let us know how we can help you bridge the gap to those days.