Chinese Commodity Prices and Your Supply Chain

Have you noticed prices from your Chinese suppliers increasing in the last month and a half or have you been living in a cave? Is there anything you can do to stop these increases from impacting your bottom line as much?

If you read us, the answer is yes (about the prices, not the cave) and yes.

Know Your Materials Cost

One long-time, U.S.-based sourcing professional who works with suppliers in China told us that his company is seeing prices for raw materials from China up 70% for zinc, steel prices up 60%, packaging costs up 50% — this one is particularly surprising — and plastic resins up 30% this year.

While many of these costs go to a supplier’s bottom line, being an educated buyer can stop you from having them passed directly to yours. Our sourcing professional sources paint rollers with a frame that’s composed of steel and plastic with some packaging for shipping.

Always adjust your costs with labor, overhead and profit in mind whenever commodity price increases are passed from a supplier to you. Know what percentage of that cost is steel and limit any increase to it. Only about 25% of the roller frame’s cost was actually raw steel material in the example above. Percentage calculations should also be applied to the packaging and plastic resin costs.

My colleague, Taras Berezowsky, explained in his post linked above that the increased costs for plastic resins do have a direct relationship with increasing oil prices and the appreciation of the U.S. dollar against other currencies looks like a march that’s only beginning and that it will affect most commodities for at least the first half of 2017.

Potential Pull Back

Still, even if you have not purchased forward very far into the new year there will be opportunities to buy these commodities when prices are momentarily falling rather than following the overall bullish trend. For metals, my other colleague Raul de Frutos recently explained — with holiday flair — why prices do not rise in a straight line and how you can use that fact to your advantage.

“If they move up quickly, buyers are tempted to take their profits until markets digest those gains. This is normal price action and why we normally see prices moving in a zig-zag… (in metals) there’s already been some profit taking and as prices pull back, buyers can find good opportunities to time some purchases.”

Timing your purchases to coincide with price pull backs requires paying attention not just to Spend Matters (which you should always do, anyway!), but also to individual markets. You might have to learn what the Philippines means to nickel production, but the commitment of time and energy is certainly worth it your bottom line to identify times that are ripe for a pull back.

Speculation Situation

When purchasing Chinese commodities, it’s important to note that those traded on the Dalian, Zhengzhou commodity and Shanghai Futures Exchange have all toughened trading requirements several times in recent weeks. This is being done to tamp down what Beijing sees as dangerous, speculative trading.

Australian Reuters commodities columnist Clyde Russell recently wrote that “there are good reasons to believe that the Chinese commodity party may be winding down.”

He also wrote that “ultimately the Chinese authorities are going to have to decide whether they want their commodity exchanges to be true global players, attracting a broad spectrum of users, or whether they should remain as sort of casinos for yield-chasing locals.”

Every time authorities change the trading rules for a short-term aim, they serve to remind investors of why they should be cautious about trading commodities in China and why you should be just as cautious in your forward purchases.

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