Commodity Market Outlook -

Manufacturing Sector Insight

 The ongoing slowdown of the global economy continues to put a downward
pressure on commodity markets. Although global inflation has started to moderate,
price pressures remain at historically high levels. The combination of high prices
and rising borrowing costs constrain consumers and businesses. Subdued consumer
spending on goods and services and sluggish manufacturing activity, accompanied
by weaker B2B demand and capital investment growth, are set to reduce demand
for energy and metal commodities, and cap price growth this year.

Commodity Price Trends Upside risks Downside risks

Higher demand from Asian countries, Lower global demand amid economic
Energy Price Index Mar 2020-Jul 2023
particularly China slowdown
2010=100
200
Ramped-up adoption of renewables and
Supply cuts by OPEC+
150 energy efficiency
Energy
100 Difficulties with gas storage refilling in
Mandatory energy demand reduction
Europe
50
Vofayaucable weather (limiting output or Resilient production output, successfully
0
boosting demand) reshuffled trade flows

Metals Price Index Mar 2020-Jul 2023 Accelerated growth in China Recession in the USA
2010=100
150
Supply disruptions in Latin America Slowdown in construction industry
Metals 100
Elimination of Russia from export Higher interest rates and weaker B2B
50 markets investment growth

0 US dollar depreciation Oversupply of metals

Source: Euromonitor International from World Bank

Prices of metals ease following weaker-than-expected demand recovery in China

The prices of key base metals declined by 16.6% in Q1 2023 due The stability of metal prices in 2023 will depend on the growth
to weaker global B2B demand and increased supply of metals. of China’s manufacturing sector and the stability of metal ore
Slower-than-anticipated demand rebound in China further supply. China’s economic recovery remains fragile, and the
contributed to the lower prices of industrial metals. Despite duration of its accelerated growth remains uncertain.
China’s economic expansion in Q1 2023, the construction sector A stronger recovery in the manufacturing sector in the second
faced challenges, with real estate development investments down half of 2023 could drive up demand for metals and accelerate
by 4.0% year-on-year from January to May. As the construction price growth.
industry consumed 23% of metals in China in 2022, weaker Potential supply disruptions in Latin American mines could
growth negatively impacted the demand for steel, aluminium contribute to price volatility in 2023, especially in the copper
and copper. On the other hand, higher production volumes in the and lithium markets. For example, political protests in Peru
automotive sector lifted demand for lightweight metals. and Chile led to temporary production scale-backs of metals
Additionally, increased metal supply contributed to lower in Q1 2023. Furthermore, the potential elimination of Russia
prices of metals. The largest miners such as Rio Tinto, Vale, and from export markets may cause disruptions in metal supply,
Glencore reported increased shipments of non-ferrous metals primarily affecting the automotive, aerospace, and renewable
in Q1 2023 and contributed to the moderation of prices. Higher energy sectors.
production output of nickel in Indonesia and the lifting of the While commodity prices have eased from last year’s highs, they
nickel export ban imposed by the Indonesian government in persist at historically elevated levels. This continues to present a
2020 are also projected to limit metal prices in 2023. heightened cost burden for businesses and dampen consumer
purchasing power and affordability.

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Energy prices to ease in 2023, but multiple upward risks persist
Energy prices are set to average lower in 2023 compared Although energy prices eased from the 2022 peak,
to last year amid weaker global demand prospects and a businesses continue to face elevated cost pressures and
healthy supply outlook. As per the International Energy squeezed margins, especially across energy-intensive
Agency’s (IEA) estimates, healthy oil supply growth in the industries, such as chemicals, metals, cement and
US, Canada, Brazil, Norway and Guyana is expected to transportation. To mitigate the impact, companies are
offset the restrained output in Russia. There are, however, increasing investments in renewable energy and energy-
upside risks, including stronger-than-expected demand efficient solutions, optimising energy consumption,
from China’s manufacturing sector, cuts in global supply turning to alternative fuels, stockpiling, price hedging and
and US dollar depreciation.. relocating to regions with lower energy costs.

Biggest losers, and what it means

While prices of soft commodities are rising energy and inventory levels have reached 75%.
industrial metals are trading a lot lower. Iron ore is primarily used to make steel, an important material
Among the biggest losers of the commodities slide are in construction and engineering projects.
iron ore and oil, the analysts concur. They have also cited “Commodities such as industrial metals tend to move lower
the downbeat prospects of copper, which acts as a proxy ahead of economic leading indicators like PMIs and historically
economic pulse check due to its various uses such as have helped signal when a downturn might occur,” said
electrical equipment and industrial machinery. Director of Commodities and Real Assets at S&P Dow Jones
Weak energy consumption in Europe, in part due to a warm Indices, Jim Wiederhold.
winter, has led to gas storage surging to past-five-year high “In general, many major commodities slumped over the last
levels in the EU, and pushed down prices. Additionally, the few months as companies and consumers reduced their
world’s largest oil importer China, has been ramping up demand ahead of a potential economic downturn,” he said.
coal production instead amid a power crunch. Commodities also tend to move in tandem with changes in
According to BofA, the year-to-date average of steel and inflation, Wiederhold continued. And if inflation continues to
iron ore prices dropped 16% year-on-year on the back of dip lower, commodity markets could see more downside in
sluggish construction demand. Poor construction demand the short term, he said.
also reflects in other building materials like cement, whose

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In the world of procurement, this is an important moment to pivot your approach.
Whereas in recent years your focus may have been on This comes to the very heart of procurement’s strategic role
securing the supply of hard-to-get products at a reasonable in the success of a business.
price, there is now a need to take a broader look at the At difficult times, such as the economic mood souring,
costs in the business. As the economic climate tightens procurement can both protect the organization and place
and price increases become less of a viable tool to increase it in a position to reap economic benefits upon a return
profits, business leaders will shift their focus to maintaining to growth.
or improving margins through cost reduction. Some firms will be well-equipped to understand how to
It’s also usually the case, especially following a period best unlock the full potential cost opportunity; others
where attention has been elsewhere, that there is will find themselves under-prepared, lacking the key
substantial room for cost reduction in the supplier space. resources, market intelligence, and category strategy to
Costs may have crept up beyond current market, or harness the value.
services may be being duplicated across the business. We For everyone working in or with procurement, now is the
saw one business recently who achieved a 50% reduction time to be getting ready for the next big challenge and
in their shipping costs, as their previous rates had been ensuring procurement is at the heart of strategic business
negotiated at a time where prices were far higher, and solutions just as it has been during the period of volatile
similar trends are occurring across the wide range of goods supply chains in recent years.
and services purchased by leading organizations.

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 Indices and Margins
At ERA, we know what good looks like. We work with structure to negotiate good and fair pricing with suppliers
suppliers all over the world on a daily basis, from energy and all the while ensuring they are consistent with their
to office supplies – providing us the insight we are able to approach. The graph below shows that the delta price has
provide our clients. risen 38% between 2020 and 2023. Some of this increase
Take the below as an example. You will see the delta prices is due to inflation and higher running costs, but outside of
enable us to clearly separate the supplier costs and margin market fluctuation, this increase is not justifiable so there is
from the market fluctuation. This give greater insight and also extra margin to negotiate.

38% increase on
Delta Price

0.94€
0.68€ Delta
Delta Price
Price

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