The Correlation of Supply Risk Events and Commodity Price Increases

When future economists run regressions looking for correlations between the commodity price hikes and volatility in recent years, etc., I suspect it's likely that supply risk events will have the tightest correlations with certain price spikes. Consider the case of DRAM, an electronic commodity item if there ever was one. DRAM has recently "gone up by about 6% in the first half of April, as PC OEMs are advancing their procurement schedules for the high season amid anticipated shortages," according to sources at memory makers. The reason that hardware providers "are actively looking to secure supply as early as possible" is that they "are aware that failure of blank wafer and other main raw material supplies from Japan may result in severe chip shortages." After the increase, April contract prices for "2GB and 4GB DDR3 modules averaged US$18 and US$35." And if "issues relating to upstream material supplies persist for a prolonged period of time" prices for the lower capacity module "will likely" exceed $20 in May or June.

A recent piece in Forbes CIO Central by two PRTM consultants has some additional details on disruptions and potential resulting timelines. According to the above-linked column, "the crisis that began with the earthquake of March 11 has created shortages at the operations of more than 25 companies" with some organizations "lacking as many as 300 different electronic components." Are the problems likely to get worse before they get better? PRTM suggests that "for each week that supply is not available, it takes approximately four to six weeks to recover overall supply-demand balance, re-prime, and rebuild inventories across the value chain. In the case of Japan, the disruptions to the electronics supply could last two to three quarters as original equipment manufacturers work through the chaos to re-balance supply chains and customer commitments. And that does not account for instances where an OEM depends on a component supplied by a single source."

Clearly, there's been much written about the impact of this recent supply risk incident on physical supply chains and materials availability. But the impact on the financial side when it comes to commodity prices will end up being potentially just as disruptive to businesses. After all, it's one thing to not have enough material to meet production (as is already starting to be the case with many Japanese car models). But it's another to produce finished products unprofitably because of the challenge of passing on material price increases to end-customers. Perhaps just as companies are evaluating the efficacy of their physical global supply chains in wake of the incident, they should be spending just as much time on the commodity management side as well, looking at all available options to hedge or lock-in pricing for themselves and their suppliers -- or potentially pursue another strategy -- based on their reading of the fallout from the disaster.

Jason Busch

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