Procurement Insider's Macroeconomic Update: Q1 2019

Categories : Procurement Goals | Set Strategy | Evaluate Supply Market | Identify Suppliers | Negotiate | Reduce Risk Published on : Sep 08 2018

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 commodity prices and tariffs, which are issues that are expected to substantially impact business purchases in the coming months.

Commodities

Metals

Recently, domestic prices for steel and aluminum have been growing at a faster rate as tariffs have been levied on these goods, which has caused US consumers to demand more domestic metals. For example, from May to July, the price of steel increased at an estimated average rate of 2.6% per month, up from an average rate of 1.0% per month over the same time period in 2017. Similarly, aluminum prices have also been exhibiting faster growth than the prior year. Alternatively, domestic copper prices have fallen recently amid shrinking demand from China, the world’s largest consumer of the metal.


In light of continued growth in steel and aluminum prices, procurement professionals may benefit from purchasing these goods now to lock in lower rates. Additionally, buyers with global supply chains that still rely on imported products may be able to secure lower prices by sourcing steel and aluminum goods from alternative trading partners that are currently exempt from tariffs. For example, Argentina, Australia, Brazil and South Korea are all exempt from steel tariffs, and Australia and Argentina are also exempt from aluminum tariffs.

Oil

Oil prices have continued to trend upward. According to the US Energy Information Administration’s most recent Short-Term Energy Outlook report, consumption of liquid fuels has been outpacing production levels by about 0.3 million barrels per day, which has given oil producers greater pricing power. ProcurementIQ projects that world oil prices will continue to rise at an average annual rate of 5.0% through 2021, especially as consumption continues to exceed supply. Therefore, procurement professionals can benefit from locking in contracts now before goods like diesel fuel and services like domestic air cargo transportation rise in price.


Key Takeaways:

  • Domestic steel and aluminum prices have been rising as tariffs have been implemented.
  • Oil prices have continued to trend upward amid lower supply, which will continue through 2021.
  • Buyers should lock in lower rates now to hedge against growing steel, aluminum and oil prices.
  • Buyers may shift to alternative trading partners exempt from duties on steel and aluminum.

 

Tariffs

Over the past year, the Trump administration has levied numerous tariffs against other countries in response to perceived unfair trade practices. The trade war has amplified in recent months as the United States has targeted imports on about $50 billion worth of Chinese goods. In addition to weighing tariffs on an expected additional $200 billion of Chinese imports, the Trump administration has also threatened to levy tariffs on nearly $350 billion worth of automobiles and related parts from around the world. Due to the volume of goods imported from China, procurement professionals should be aware of how these tariffs can potentially impact the prices of products and services.

A Closer Look at Chinese Goods

Tariffs have been placed on a large number of finished goods from China, which can have a ripple effect on the prices of other products and services in the United States. For instance, the first round of tariffs imposed duties on a variety of tools for working metal, such as metal cutting tools and metal rolling machines, thus potentially increasing the operational costs of manufacturers that rely on this type of equipment. Along similar lines, the machinery for manufacturing paper products is also subject to the new tariffs, which can add to the costs of producing the packaging used to ship and store goods after they are finished, such as corrugated boxes. Even the lubricating oils necessary for maintaining machinery are now subject to new tariffs.


The tariffs have also targeted a variety of intermediate goods. For example, the new duties on magnetic disk drives are expected to contribute to the cost of manufacturing laptop computers and desktop computers domestically. Likewise, tariffs on refrigerating equipment and compressors will potentially impact the production costs of commercial refrigerators and freezers, walk-in refrigerators and industrial refrigerators, which require these parts to function. The plastic film imported from China and used to manufacture packaging products, such as plastic bags and flexible packaging, has also been affected by the tariffs. Ultimately, the tariffs are expected to increase production costs for manufacturers, which in turn will put upward pressure on prices for end users.

Although manufacturers will bear the brunt of the tariffs, procurement professionals should be aware of how service providers could be affected. Most significantly, service providers that rely on goods subject to tariffs could experience higher operating costs. For example, providers of managed print services that offer onsite printer maintenance will face higher prices for printer parts, which are now subject to tariffs. Providers in the facility maintenance and repair services market may face similar challenges, due to increasing parts costs. As purchase costs increase for these service providers, they are likely to pass these new expenses on to customers in the form of higher prices.

Fortunately for procurement professionals, ProcurementIQ has identified a number of supply chain management strategies to help mitigate the negative impact of the new tariffs.

Key Takeaways:

  • Since July 2018, tariffs have been placed on $50 billion worth of Chinese imports.
  • The tariffs are expected to drive up manufacturing costs, which will translate into price growth for domestic products.
  • Service providers that rely on inputs subject to tariffs may increase prices to protect their profit margins.

 

This quarter's macroeconomic update was researched and written by Lead Analysts Braden Baseley and Torsten Edstam. 

 

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