Friday Rant: Despite Declining PMI and GDP Revisions, Don't Assume Commodities Will Slack

This was a horrible week for the capital markets. Actually, it's been a horrible couple of weeks. Washington has proven to the world how inept both the Legislative and Executive branches of government are at passing any reforms designed to materially get our economic house in order, permanently (hint: it's one thing to agree on raising the debt ceiling beyond its current astronomical levels; it's quite another to go into summer recess without passing a basic motion to collect the roughly $30 million in lost FAA excise tax revenue that's evaporating each day). Moreover, aside from the Parliament of Whores who are now on summer holiday or fundraising for another term while collecting birthday well-wishes at taxpayer's expense in my hometown, a range of economic indicators, including ISM PMI (both manufacturing and non-manufacturing) indexes, the Conference Board's Employment Trend Index, poor unemployment numbers and a revision of Q1 GDP numbers are collectively showing tepid, nearly negative, economic activity. Whew. Now that was a mouthful.

In addition to the fact the US has proven to the world it can't govern itself (let alone others) with the debt ceiling charade, new economic data that's emerged suggests an economy that could very likely head into negative territory. Yet I'm here to tell you today that if you think we're out of the commodity price risk rut just because demand and output may slow, you're out of luck. The partial commodity correction we've seen this week has been tied to the general capital markets sell-off rather than any fundamental changes in underlying supply, demand and speculative components.

For a variety of reasons, I believe that volatile -- and even rising -- commodity prices are here to stay. Sure, some commodities like cotton have come back down to earth in the past two months, but others, like guar gum, which we'll feature on Monday, are through the roof. I personally believe a combination of continued solid if not robust emerging market demand, continued speculation (i.e., better to own hard assets that depreciating currencies) and the motivation of the US government to maintain a weak dollar (which impacts the cost of dollar-denominated/traded commodities from oil to copper) will continue to cause a decoupling of US economic activity from broader commodity inflation potential. Of course, I could be wrong. And let's hope I am. But I'm not hopeful that we'll see a general let-up in commodity prices anytime soon, aside from some minor corrections we'll see offset by new rises in other areas.

In my view, procurement and finance organizations should take the latest numbers and continued volatility in the commodity markets as a signal that they should double down in their efforts to drive better forecasting and minimize the impact of cost variation and volatility through concerted commodity management strategies linking strategic sourcing, supplier management and trading/commodity execution strategies and technologies together as one. Any manufacturer with material metals or resins spend on a direct or indirect (supplier pass through) basis, for example, should carefully investigate the potential of demand aggregation programs working across divisions and suppliers. At the least, such programs will provide visibility to broader exposure that in turn can bring executives to the table to collectively decide the best options going forward.

Technology wise, companies should get serious about looking not only at demand aggregation options, but real sourcing technology from vendors with a proven track record of supporting complex, direct materials categories with advanced capabilities (e.g., Emptoris, BravoSolution, Iasta, Co-Exprise, Trade Extensions, CombineNet) combined with spend analysis tools that can incorporate pricing indexes and related records alongside traditional spend cube information. Procurement teams also owe it to themselves to buck up on commodity management platforms.

I'm done with this rant for today, but if I've scared you enough to begin to investigate your options, it's worth downloading our recent sourcing and commodity research on the subject: (A Foundational Look at the Evolution of Sourcing Technology and Platforms and Advanced Sourcing Technologies and Platforms to Broaden a Portfolio) as well as A Personal Lesson: Reaching the Limits of Reverse Auctions and Strategic Sourcing: When Collaborative and Quantitative Approaches Would Have Delivered More. I might not be able to get you out of paying your share of the national debt, but I can guarantee if you get smart on addressing commodity risk through better sourcing practices and insight that you'll save your organization a bundle and cause a lot less heartburn among your colleagues. Great recession part deux. Or not.

Jason Busch

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