With Sky-High Gold Prices and Oil at $100 a Barrel, What Sourcing Professionals Must Consider

Lately I'm sure we've all been reading the wire headlines about commodity price increases and general volatility in global markets (such as oil). But I find that putting myself in the shoes of sourcing, supply chain and finance practitioners, I'm often left without necessary context to look at the potential downstream implications of price activity (e.g., rising related commodity prices such as resins, allocation markets/raw material constraints, logistics costs/fuel surcharges, etc.). Even though I don't actively consult on global sourcing anymore, I have colleagues that do (especially in the metals markets), and I sincerely believe there's an actionable information vacuum out there at the moment. Consider today's headline from a Reuters wire dispatch that suggests "crude oil prices jumped to a 2-1/2-year peak and gold hit an all-time high ... as investors worried that widening unrest in Libya could spread to other oil-producing nations in the Middle East."

No doubt, it's important in terms of commodity management to know that "crude oil futures jumped to as high as $106.95 per barrel, the highest level since September 2008" today. Multi-year highs alone are scary indeed, especially given the great uncertainty of the turmoil in Northern Africa and the Middle East. But information like this is not enough to make decisions for taking potential commodity risk off the table (and the costs associated with either direct or indirect hedging decisions), let alone looking at the potential cascading impacts of supply risk.

In this one commodity market, there are a far greater range of factors to consider which I believe are not only contributing to speculative interest, but can also help inform better sourcing and commodity decisions for sourcing in general. These include China's insatiable thirst for oil (growing, according to IAGS, at over seven times the US rate) of which 58% today comes from the Middle East. Moreover, IAGS also suggests that the Middle East share of Chinese oil supply could hit 70% by 2015. In other words, as China becomes even more dependent on a region hit by an escalating crisis, the potential for downstream supply disruptions for manufactured goods, general appreciating cost pressure (for everything from derivative raw material inputs to logistics) and regional allocation markets for key inputs are becoming increasingly higher.

Higher prices for raw materials are also more likely to create bullwhip effects in the supply chain, as different tiers of suppliers, especially in global markets where credit is dear, will keep a lid on inventory levels to better manage their working capital. In short, companies who are taking an active interest in hedging in the oil and energy markets and related FOREX exposure very well might not be doing enough if they fail to consider the broader and localized supply chain impacts across manufacturing -- especially in regional markets -- that could result from current trends in the market. Oil prices are just the very, very beginning.

Don't believe me? I remember the last time that oil prices were this high in 2008, we received a faxed letter from a client about being put on allocation for key commodities in their industry -- the bedding market. Forget about higher prices at the pump or rising cost structures -- how's that for not sleeping well at night when it comes simply meeting customer demand at any cost?

For further reading, you can check out a recent rant on the subject: Don't Wait for African/Middle East Supply Chains to Self-Combust.

Disclosure: The author maintains long positions in United States Natural Gas Fund, LP (UNG) and First Trust ISE Revere Natural Gas (FCG). Positions may change at any time.

- Jason Busch

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