Each quarter, ProcurementIQ prepares an update that identifies the most significant recent macroeconomic trends affecting procurement professionals. ProcurementIQ's updates are intended to help these professionals better understand the broader purchasing environment and make strategic buying decisions. This quarter’s update focuses on tariffs, commodity prices and net neutrality, issues that are expected to substantially impact business purchases.
Steel & Aluminum Tariffs
In early March, President Trump issued an executive order instructing the Commerce Department to impose tariffs on steel and aluminum. All else equal, tariffs increase prices for imported goods, thereby making domestic goods more attractive to U.S. consumers. On May 31st, President Trump lifted temporary exemptions for the European Union, Canada and Mexico, increasing diplomatic pressure as the administration attempts to renegotiate key trade agreements with these blocs. However, countries like China and Canada have already retaliated by imposing their own duties on U.S. exports. The European Union, meanwhile, has challenged the legality of the tariffs by filing a request for consultations with the World Trade Organization.
Price of Steel
The implementation of these tariffs is anticipated to harm U.S. industries relying heavily on steel and aluminum inputs, especially among larger firms with global supply networks. For example, downstream industries like canning and automotive manufacturing use imported metals to produce final goods, so these tariffs will raise their production costs. Sourcing from domestic steel and aluminum producers will provide little relief to such industries. When tariffs crowd out foreign competitors, domestic producers often benefit from greater pricing power, giving them leeway to raise their prices. In fact, ProcurementIQ expects prices for U.S. steel to grow faster during the next three years, rising at an estimated annualized rate of 6.4%. Overall, these protectionist measures are projected to raise prices for final goods like cans and pails, hurting buyers. Nevertheless, buyers can lock in long-term supply agreements or shift to alternative goods to hedge against the effects of these tariffs.
- Tariffs raise prices for imported goods, giving domestic producers greater pricing power.
- Steel and aluminum tariffs will raise prices for products like cans and auto goods.
- Buyers can enter long-term supply agreements or shift to alternatives to hedge against tariffs.
The oil glut of yesteryear has officially ended. An oversupply of oil had been placing downward pressure on prices over the past few years, but as world production has fallen, prices have been climbing again. According to the Energy Information Administration, U.S. crude oil inventories are down 88.4 million barrels compared to this point last year. Unsurprisingly, U.S. oil prices reached over $70 per barrel this month, the highest level since 2014.
Price of Diesel
As oil prices continue to rally, several downstream plastics, fuel and transportation markets are expected to face higher production costs. As a result, prices for goods and services like diesel fuel and domestic air travel are expected to continue climbing through 2021. Therefore, buyers should look to lock in contracts sooner than later to achieve the best possible prices.
- Oil prices are projected to continue growing amid shrinking supply.
- Downstream plastics, fuel and transportation markets relying on oil inputs are projected to face higher prices through 2021.
- Buyers can lock in contracts now to attain lower prices.
In December 2017, the Federal Communications Commission (FCC) repealed Title II net neutrality rules, giving internet service providers (ISPs) the right to block content or modify web traffic speeds as they see fit. However, certification for the repeal, which was supposed to occur in late April, has yet to be completed by the Office of Management and Budget. The ruling has received pushback from multiple states, many of which have threatened to sue the FCC or drafted their own net neutrality laws. In perhaps the most significant development, the Senate officially voted to nullify the FCC’s rollback in mid-May, although the looming House vote remains uncertain. Overall, if net neutrality were to be repealed, services like web hosting would rise in price.
- FCC repealed Title II net neutrality, although it has yet to be certified.
- Senate recently voted to nullify the FCC’s decision; House vote awaits.
- Repeal would contribute to rising prices for web hosting services.
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