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Commodities

Metals

From October to December 2018, domestic prices for steel and aluminum exhibited declines, a reversal from several months of consecutive growth following the imposition of tariffs earlier last year. Amid continued uncertainty regarding US-China trade relations, demand for these metals trended downward recently, thereby depressing prices. For example, the price of steel declined at an estimated average rate of 0.3% per month from October to December. Meanwhile, aluminum prices fell at a faster average rate of about 0.8% over the same period. In spite of these declines, steel and aluminum prices are still up for the year; steel prices increased roughly 12.4% from 2017 to 2018, whereas aluminum prices exhibited year-over-year growth of 12.0%. Lastly, domestic copper prices increased at an average monthly rate of 0.4% from October to December amid a supply deficit; overall, prices grew 4.2% from 2017 to 2018.

ProcurementIQ projects that domestic steel, aluminum and copper prices will exhibit growth over the next three years, driving up prices for goods like sheet metal. Therefore, procurement professionals can shift to substitutes or lock in long-term supply agreements to hedge against these rising metal prices.

Oil

According to the US Energy Information Administration’s most recent Short-Term Energy Outlook report, production of liquid fuels outpaced consumption levels by about 1 million barrels per day in the last quarter of 2018, which has contributed to recent declines in oil prices. The uptick in production has occurred primarily within non-OPEC countries, chiefly the Unites States and Brazil. Nevertheless, oil prices have started to rebound since December, a bullish trend that ProcurementIQ expects to persist through the end of 2019. In fact, ProcurementIQ projects that world oil prices will rise at an average annual rate of 3.6% through 2022, especially as consumption surpasses global supply. Therefore, procurement professionals can benefit from locking in contracts now before prices for goods and services rise in downstream industries, such as plastic film and national trucking services.

Key Takeaways:

  • Domestic steel and aluminum prices declined in Q4 2018, although they are still up for the year.
  • Steel, aluminum and copper prices are forecast to continue growing over the next three years.
  • Despite recent declines, oil prices are expected to rebound through 2019 and onward.
  • Buyers should lock in lower rates now to hedge against growing metal and oil prices.


Policy

Trade

The United States has continued to levy tariffs on a large number of Chinese goods, which currently affect around $300 billion worth of imports. Tariffs on $200 billion worth of Chinese goods enacted in September 2018 were scheduled to increase from 10.0% to 25.0% on January 1. However, the Trump administration recently delayed its implementation to March 2 pending continued negotiations with China. If no deal is reached, prices for various goods like activated carbon may spike in price.

Meanwhile, the United States reached an agreement with Mexico and Canada in November to overhaul key provisions of NAFTA. Its successor, the United States-Mexico-Canada Agreement (USMCA), would potentially shift more auto production to North America, which could raise prices for passenger vehicles and an assortment of trucks. The deal, which also includes a handful of measures meant to protect US agribusinesses, will become official once it is ratified by all three countries’ legislatures. Congress is expected to vote on the USMCA in 2019.

Interest Rates

In December 2018, the Federal Open Markets Committee (FOMC) set the current federal funds rate between 2.25% and 2.50%, which marked the fourth quarter-point increase for 2018. At the same time, the Federal Reserve lowered its projections for future rate hikes in 2019, with the FOMC forecasting only two quarter-point increases for the year. Nevertheless, as interest rates continue to rise, the cost of borrowing is expected to grow as well. As such, procurement professionals may benefit from locking in lower rates for equipment financing services now to hedge against higher interest expenses.

Key Takeaways:

  • Tariffs on $200 billion worth of Chinese goods may raise to 25.0% in March pending further negotiations, which would raise prices for various chemicals and machinery.
  • Pending approval, the USMCA will replace key provisions of NAFTA.
  • One potential consequence of the USMCA would be costlier auto production in North America, which would drive up prices for vehicles.
  • The Federal Reserve has continued to raise interest rates incrementally, with two more hikes anticipated in 2019. Buyers should lock in financing agreements now to attain lower rates.

By: Braden Baseley, Senior Analyst, ProcurementIQ

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