- Tags : Price Volatility
By: ProcurementIQ Anlayst, Jessie Chiang
Steep price fluctuations in a market expose buyers to a variety of risks that can affect their purchasing power. Sudden price shifts, driven by factors such as volatile input costs or demand, complicate negotiations, lead to supply disruptions and make it difficult for buyers to budget for future expenses. High price volatility is not unique to any specific market or market type; on the contrary, it affects a wide range of industries markets, such as oil and gas, building materials and technology. ProcurementIQ has provided detailed analysis on the causes of price volatility in these six markets and offers recommendations on how to reduce their exposure to significant price shifts.
Oil & Gas: Diesel & Ethanol
Diesel and ethanol prices have been historically volatile due to geopolitical changes, supply shifts, regulatory changes and a variety of other factors, and 2016 has been no exception to these extreme year-to-year shifts. According to ProcurementIQ, the price of diesel fuel is expected to decline 20.1% this year. Meanwhile, the price of ethanol is expected to surge 22.9%.
Ethanol prices will climb significantly in 2016, rebounding from the previous year’s steep price declines. This trend has largely been driven by growth in demand, lifted by ethanol’s increasing popularity as a fuel additive and direct fuel substitute. Volatility in the price of corn has also compelled suppliers to raise prices at a faster rate. A large jump in price in 2016 will put significant pressure on buyers, and with more price increases looming in the next three years, buyers should lock in lower prices and seek discounts when possible.
Conversely, the price of diesel fuel has fallen drastically, due in large part to the plummeting price of crude oil. This is because crude oil is a key input material for diesel production; in fact, ProcurementIQ estimates that it accounts for 63.8% of the average diesel supplier’s revenue. In 2016, crude oil prices are expected to plunge 24.1%, driven by growing domestic oil production and steady production from OPEC. Despite the cost benefits that buyers experience from falling fuel prices, they should still seek out long-term contracts to lock in current rates because oil and diesel prices are both expected to rebound in 2017.
Building Materials: Drywall & Copper Pipes and Tubes
In addition to fuels, there has been significant volatility in the prices of important building materials, such as drywall and copper pipes. Drywall prices have grown at a significantly slower pace since 2014 due to limited gains in private nonresidential construction, which have been hampered by declining corporate profit. This slower growth has been a volatile shift from substantial increases in price in previous years. Slowing increases in the price of gypsum, the primary material used to make drywall, has also led to slower price growth. As a result, buyers are advised to engage in contracts to limit price growth and to leverage a larger total value to keep costs down.
The price of copper pipes and tubes has fallen with significant volatility in 2016, largely driven by substantial declines in copper prices. Weaker demand for copper has resulted in an oversupply, which has led to steep price drops. This trend is particularly important to copper pipe prices because raw copper accounts for an estimated 59.3% of revenue for the average copper pipe and tube supplier. Accordingly, the 15.1% drop in world copper prices expected in 2016 will result in the average price of copper pipes and tubes falling 10.3%. However, ProcurementIQ forecasts that this trend will reverse in the three years to 2019 due to rebounding copper prices, further contributing to the high level of price volatility for copper pipes and tubes. Buyers should, therefore, seek contracts to lock in prices now before they increase.
Technology: Hard Disk Drives & Solid State Drives
Hard disk drives and solid state drives are key digital storage devices used in a variety of technology applications, such as laptops and tablets. Both types of drives are expected to shift in price with significant volatility in 2016 as a result of intense market competition and falling input costs.
Hard disk drives and solid state drives are both fairly commoditized, which has led to significant competition among suppliers. Competition from competing substitutes has also put pricing pressure on suppliers of these drives; in particular, cloud storage services have emerged as an increasingly popular alternative. Cloud-based services provide digital storage that can be accessed by multiple users through a variety of devices, as long as the user has an internet connection. Cloud storage allows buyers to outsource some of their data needs and reduce their reliance on physical drives. Competition has been especially intense for solid state drives, which are growing in popularity due to their higher storage capacities and increased durability. In fact, ProcurementIQ expects a 50.5% price drop for solid state drives in 2016. Meanwhile, the price of hard disk drives is expected to fall 5.4% in the same year.
While high volatility in the price of both of these products makes it more difficult for buyers to project costs, prices are declining overall. As a result, buyers will benefit from in the form of cost savings. In addition, prices for both products are expected to continue falling in the next three years. Contracts will lock in prices and enable buyers to more accurately budget for their purchases; however, buyers that do so will miss out on projected price declines during the next three years. Buyers can also seek discounts by bundling additional goods, purchasing in bulk or delaying ad hoc purchasing decisions until prices fall further.
Purchasing from Volatile Markets
Volatile prices will affect buyers differently depending on the individual market. In volatile markets where prices fluctuate significantly and are forecast to increase, buyers should consider contracts to lock in prices and shield themselves from future price growth. However, for markets that have volatile prices that are consistently declining, like hard disk drives, buyers should consider delaying purchases to maximize cost savings. To achieve purchasing goals and maximize savings, buyers must remain up to date on the pricing climate of the market they plan to purchase from, as well as the costs of inputs and raw materials commonly used in that market.