Commodities Update June 15, 2012

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1 1 United Sourcing Alliance actively monitors market pricing to ensure our supplier partners remain competitive with market fluctuations. Below you ll find our latest update on key commodities and currencies. Please contact Gene Smith at or Ext 14 if we can assist you further. Commodities Update June 15, 20 ISM Report on Business The latest report shows that the manufacturing sector grew for the 34 th consecutive month with the Purchasing Managers Index (PMI) reporting a reading in May of 53.8%. A PMI index over 50 represents growth or expansion within the manufacturing sector of the economy compared with the prior month. The New Orders Index was up with stable to strong orders and a steady increase in sales through the first five months of this year. The Price Index fell in May indicating the first decrease in raw materials prices since December of 20. Of the 18 industries participating in the survey, 13 reported growth in the month of May. The ISM Price Index came in at 47.5% in May compared to the 61.0% reading in April. This is the first decrease we have seen in raw materials pricing since December of 20. Of those participating in the ISM report: 19% reported paying lower prices, 67% reported paying the same, and 14% reported paying higher prices. Commodities reported to be up in price are: Aluminum, Copper, Natural Gas, and Electrical Components. Commodities reported to be down in price are: Caustic Soda, Rubber, Steel, and Stainless. We also saw some decreases late in the month of May with Resins and Plastic Components. ISM Commodity Price Index - YTD Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Reported on the first business day following the close of the month, the ISM reports are the first look at economic activity for the prior month and are closely watched by policy makers and economists. You ll find a link to each monthly report on our web-site s home page at

2 2 MARKET UPDATES Polyethylene What a difference a quarter makes in these markets. In our last report we were talking about increases and indeed those came into play. But we also talked about the fact that those increases were likely to be short lived and now we are seeing just that. The increases from December through April of $0. per pound were mostly erased in May with a reduction of $0.07 per pound. The forecast is for further reductions in the month of June which will likely push the per pound prices below the November 20 numbers for all grades. Domestic demand has slowed, exports remain sluggish, and days of inventory are up. HDPE High Density Polyethylene (used in carpets, containers, bottles, bags, much of what goes into your recycled bins on trash day): Domestic demand for HDPE is fairly flat for the first 5 months of 20 but exports were off as much as 21% compared to the same period a year ago. Operating rates are running at about 88% and inventory levels jumped to 36 days of supply which is about 3 days above normal. As demand falls and inventory builds expect suppliers to offer significantly lower prices to move volume. Expect additional reductions in June and into the third quarter. LDPE Low Density Polyethylene (used in tubing, food trays, bags, and the plastic rings that hold beverage cans together): With prices in ethylene and PE resin markets significantly falling in the past 6 weeks the dynamics of the industry has changed. Buyers are reluctant to place large orders until they see where the markets are going to bottom out at. As a result the already weak demand is made to appear even worse and producers are getting very aggressive with lower prices in order to move inventory. We expect prices to fall even further through the 3 rd quarter before making a slight recovery in Q4. LLDPE Linear Low Density Polyethylene (used in stretch film, shrink film, sheeting, bags, and other flexible packaging products): LLDPE inventory levels grew to 59.5 days of supply in early May or.5 days above average. Domestic demand is down about 2% and export demand is down 19% YTD. We expect pricing to follow the same path as LDPE with further reductions through the 3 rd quarter before recovering or stabilizing in Q4. LLDPE Prices Mar- May- Jul- Sep- Nov- Jan- Mar- May- Charts are also available for LDPE & HDPE. Contact Gene Smith if you would like those.

3 Corrugated Containers US linerboard prices have remained stable and the outlook is for that to continue. These markets are currently described by most as flat with no real growth in sight. Linerboard production is down by approximately 2% in the 2 nd quarter compared to 1 st quarter and box shipments are flat at best. Plants are not running at full capacity and export markets continue to be soft. There has even been some talk among industry analysts that unless something changes we could finally see some reductions. But with fewer manufacturers and some upcoming scheduled down time at the mill level I wouldn t bet on that happening. Look for published prices to remain fairly stable. As most of you know the International Paper purchase of Temple Inland was completed in Q1 and the move is now to comply with the plan as presented to the Department of Justice to divest itself of certain assets. IP has announced the closing of a box plant in Minden, LA and has just recently entered into an agreement to sell plants located in Ontario, CA, Johnsonville, TN, and Oxnard, CA. There have also been moves to consolidate the work force and we anticipate additional moves to consolidate plants. We will keep you posted in future updates and reports. It seems there is always some talk of attempted increases and we did hear from one supplier on the West Coast that a linerboard increase was being discussed. But that talk never gained any fundamental support from the market and we do not anticipate that happening this year. The only wild card here remains consolidation of the industry and what a fewer number of manufacturers can push through just because they can. We will continue to monitor and will send out a separate report should things change. Pulp & Paper Linerboard Index 3 $700 $680 $660 $640 $620 $600 $580 $560 $540 $520 $500 Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Chemicals Toluene: U. S. toluene prices have started to settle back down as gasoline prices continue to fall. The current price of $3.70 per gallon is almost 10% lower than the $4.00+ per gallon prices we were seeing earlier this year. Just in the last few days we have seen prices slip 4%. However, even at these reduced rates we are still well above the $3.13 per gallon price just 6 months back. Expect continued volatility as typically these markets closely follow what the crude oil markets are doing. Toluene is used as a fuel additive and as a solvent in paints, adhesives, inks, and resins. It is also used in

4 the manufacturing of polymers that are used to make plastic bottles, nylon, pharmaceuticals, and cosmetic products. Styrene: US spot styrene moved higher in late May rising 1.45 cents/lb to an assessment of cents/lb FOB US Gulf Coast due to a 16-cent hike in feedstock benzene prices. May benzene shot up to 399 cents/gal FOB USG due to a bullish market in European benzene that spread to the US. Styrene typically increases 1 cent per every 10-cent increase in benzene, according to industry sources. Sources say that Styrene demand is weak, but supply remains good. Sources reported that tanks are full despite production rates for producers hovering at 70%. Styrene is used to make many of the products we use everyday. Methanol: U. S. methanol prices have been relatively flat over the past couple of months. After a slight decrease to $1.34 per gallon after the first of the year we have seen posted contract prices level back out at $1.38 per gallon. US methanol distributor Southern Chemical Corp. has rolled over its June US contract price to 133 cents/gal ($442.89/mt) FOB US gulf from May. This is the fifth consecutive month that Houston-based SCC has posted its contract price at 133 cents/gal FOB US Gulf. After discounts and rebates of 13% average, the June contract price is close to 5.71 cents/gal. With recent volatility in the spot market industry analysts aren t sure of what to expect next, and forecasts become more difficult to trust. Chlor Alkali: The chlor alkali industry is a key component of U.S. industrial capability. Co-products such as caustic soda and chlorine - are used in a variety of products including water purification, paper, plastics, pharmaceuticals, and organic and inorganic chemicals. The economic recession has had a negative impact on many of the industries that use alkalis and chlorine, such as chemicals, paper, textiles, plastics and glass. Chlorine remains the largest product segment of these markets and growth is driven by a recovery in construction expenditures, which then spurs growth in polyvinyl chloride (PVC) demand. Chlor-alkali demand in the plastics market is forecast to experience the fastest rate of growth among the markets. Growing demand for construction products made from PVC and other plastics will support the production of raw materials that utilize chlor-alkalis, such as ethylene dichloride and phosgene. Chlorine US operating rates in May are expected to be below the previous 20 YTD range of 86-87%. This unexpected downturn is pushing rates lower, at least for the near term. Prices are under a slight downturn, but may come under increased pressure should the downturn persist. Caustic Soda This downturn in chlorine has quickly reversed the near-term direction of the caustic soda. Prices which were up in 20 and the first 2 months of 20 had actually started to ease a bit. But supply has now dropped to a point where most producers are announcing increases of $60/short ton. Of course this could be similar to the increases announced in March of this year that were never implemented into the markets. But for now it appears that some portion of the increase may actually stick. Pallets At any given time there will be approximately 2 billion pallets in use across the United States. These pallets will be in a variety of materials to include wood, plastic, metal, composites, and corrugated. Most buyers look at pallets as a commodity looking only for the cheapest per unit price. Many companies do not take into consideration the total cost of using pallets and the valuable assets 4

5 they have moving through their facilities. Pallets are an essential part of the supply chain and can have a significant impact on a company s bottom line. Pallets are becoming much more sophisticated as companies begin to look for alternatives to the standard wood pallet. Plastics are becoming more popular as a reusable option and corrugated is beginning to gain traction as well. I even came across one article that spoke about pallets with an embedded RFID tag to monitor temperature for storing and shipping produce. Very costly until you factor in the significant reduction in wasted food. In a recent survey 39% of the respondents reported that they are now using some plastic pallets in their supply chain. In the same survey 8% reported using some type of corrugated or kraft honeycomb pallet. When companies begin to consider the total costs these alternative materials are suddenly becoming more cost effective. With heat treated pallets becoming more prevalent those alternative materials are even producing savings for many companies. Both Costco and IKEA are currently taking measures to eliminate the use of wood. As mentioned above heat treated pallets are now the requirement in many supply chains. Many of you may not be aware but very soon all pallets moving goods between the United States and Canada will require a certified, heat treated pallet. The current agreement in place which exempts certified pallets will expire in 2014 and at that point costs will go up. It has been estimated that as many as 300 million pallets would be impacted when this change goes into effect. When looking at the costs of a typical 40 X 48 wood pallet, raw materials make up about 55% of the final price per unit. Some lumber prices are up slightly at the end of May but July futures are back down. Sawmills still have excess capacity and global demand is down so we would look for these markets to remain relatively flat. Steel U. S. prices for hot-rolled band products have fallen in the past 2 months by $47 to their current level of $716 per ton. Production for raw steel in the U. S. is up for the first 5 months of 20 by approximately 8% compared to the same period last year. U. S. mills shipped approximately 25 million tons in Q1-20 compared to 22 million tons in Q1-20 an increase of 13%. Despite these increases the industry continues to struggle through a weak economy. In recent surveys both buyers and sellers express concern and are less optimistic concerning the overall economic situation. In each month this year the optimism continues to dwindle away. The reports are coming in that business is slower than expected and not where it should be for this time of the year. Demand in May was down and inventories are building. Service centers shipments fell in April by 6.6% compared to March. Shipments were reported to be down across all product lines. The industry faces many uncertainties as global factors play a major role in these markets. The influence of what China may do and the debt crisis in Europe has impacted and will continue to impact steel market pricing. Forecasts are hard to trust but don t expect the current levels to stay with us forever. Predictions are for increases in 2013, flat prices in 2014, and then more reductions for Energy Outlook What a difference a couple of months make in the energy outlook. Of course, I think we have all come to expect that. After averaging just over $100 per barrel for the first 4 months of this year the West Texas Intermediate spot price for crude oil fell from $106 to $83 in just 31 days: from May 1 June 1. The forecast is for the per barrel price to rise slightly back up with a second half 20 average of $95. Oil prices are expected to remain relatively flat through Of course those numbers are 5

6 dependent on certain economic growth numbers being hit and with recent news those numbers may be in jeopardy. So we wouldn t be surprised to see even further reductions in the next 18 months forecast. Retail regular grade gasoline averaged $3.53 per gallon in 20 which was $0.74 per gallon higher than the 2010 average. The EIA is forecast for 20 has not changed much since our last report with an expected average price of $3.56 per gallon. There has been more volatility when looking at these forecasts on a monthly basis. The current forecast for 2013 is down slightly at $3.51 per gallon. On-highway diesel fuel retail prices averaged $3.84 per gallon in 20 and the current forecast for 20 is for an average of $3.90 per gallon. That forecasted average is actually $0.16 per gallon less than the same EIA forecast from last month. The Henry Hub spot price for natural gas, which averaged $4.00 per million Btu in 20, plunged to a level in April 20 of $1.95 per million Btu. A bounce back in May with an average for the month of $2.43 was the first increase in almost a year. Even with that increase the historic lows are expected to continue throughout this year with the forecasted average for 20 now at $2.55 per MMbtu. That represents a drop of right at 25% when compared to our last report. The average for 2013 is expected to rebound to $3.23 per MMbtu. A warmer than expected winter impacted demand and supplies remain plentiful. Currencies The U. S. dollar has fallen pretty much across the board losing ground to 15 of its 16 major peers. Jobless claims up and declining retail sales numbers signal a slowing US economy which is the primary driver to lost ground. Look for additional economic news and action from the Federal Reserve over the next few weeks to further impact the dollar. Most observers appear to be looking for further losses. 6/14/ Rate/US$ 3 Month chg Brazil real % Canada dollar % México peso % Euro area euro % UK pound % China yuan % India rupee % Japan yen % For buyers, a stronger dollar makes imports less expensive know the numbers and use them to your advantage. ECONOMIC NEWS For Q1 20 the U. S. gross domestic product grew 2.2% falling short of the 2.6% that had been forecast. The economy which grew at a 3% rate over the last quarter of 20 slowed as government spending fell and the build up of inventories slowed down. US consumers appear to be more pessimistic in recent surveys with a slowing economy and a weaker than expected job market. 6

7 Home Construction was up 2.6% in April compared to the previous month. Year over year starts were up almost 30% to an annual rate of just over 700,000 units. Construction of single family homes was up in April approximately 19% over the same period a year ago. And while this growth looks good compared to the dismal 2009 numbers of less than 500,000 units it is still well below the historical average of 1.5 million units. Home prices continue to struggle with several markets hitting new all time post financial crisis lows. Prices overall all are down 36% compared to their peak in 2006 and the Atlanta market has experienced the sharpest decrease over the past year at almost 18%. Existing home sales rose in April by 3.4% ending 2 consecutive months of declining sales. 20 is shaping up to be the best year for home sales in the last 5 years. New home sales also rose in April by 3.3% which is 10% better than the previous year. The inventory of homes for sale sits right at a 6 month supply which most analysts believe to be a healthy number. The hope is that as inventory levels continue to fall it will lead to a moderate increase in new housing starts in the 3 rd and 4 th quarters. U. S. Auto Sales Light vehicle sales rose 26% in May putting to ease the worries from the April numbers. April numbers were impacted by having fewer selling days so the May increase is not completely unexpected. Chrysler sales rose 30%, GM 10%, and Toyota 87%. And before you question the Toyota increase keep in mind that their sales plummeted a year ago due to the earthquake in Japan million vehicles were purchased in the month of May bringing the expected number for 20 to come in just under 14 million, an increase of 18% compared to UNITED SOURCING ALLIANCE family of Companies Transportation Insight s Rick Brumett, Vice President of Market Development International & Warehousing The Dragon's Decline and the American Renaissance Looking to China for cheap production? Not so fast. Recent wage hikes combined with rising prices mean China isn t as cheap an option as it once was. This article provides additional details into the many reasons for the return of American Manufacturing. Transportation Insight s Vice President of Market Development Rick Brumett tells us more. Click here to read more Transportation Insight's Eric Lail, Shingo Prize Examiner, Presents Method at 20 Shingo Prize International Conference in Jacksonville, Florida Eric Lail, Vice President of LEAN Performance Solutions for Transportation Insight and one of 250 Shingo Prize Examiners, will be attending the 20 Shingo Prize International Conference in Jacksonville, Florida April 30 May 3, to introduce the LEAN Supply Chain concept to the Shingo Prize community.

8 8 The Shingo Prize is an award given to companies worldwide that are implementing LEAN business processes throughout their enterprise. Click this link to read more Transportation Insight s Jay Wilson, Vice President of Processing Services The Many Benefits of Financial Settlement Services Do you know the benefits of hiring an expert to do a job? Companies who ship product are increasingly weighing the pros and cons in an effort to boost quality and improve their bottom line. Our Vice President of Processing Services Jay Wilson, outlines the benefits of a 3PL partnership with financial settlement expertise. Click the link to read more SOURCING OPERATIONS UPDATES Print Materials and Labels This quarter we are highlighting our agreement for printed materials and labels. This agreement is set in place with guaranteed savings of 10% to 15%. We will be reaching out to many of you who are not currently participating in this category to explore potential savings. Waste Expense Reduction Services We have partnered with Waste Consultants to provide clients with a comprehensive waste and recycling expense reduction solution. Waste Consultants (WCI) is a national leader of waste and recycling expense reduction services. The company specializes in substantially reducing these expenses for its clients on a risk free, results oriented basis. WCI has the ability to provide hands-on, on-site service throughout the United States. WCI is able to capture savings for its clients on over 90% of the audits it performs. Entering into an engagement with WCI requires zero funding, no budgetary review, and zero capital outlay. For information please contact us and we will be glad to facilitate a 15 minute call with WCI for you to learn more. Safety & Medical USA has recently completed an analysis of our supplier contract for safety and medical supplies, and has made a change to Fastenal for our group solution. Based on the numbers we are looking at savings of 5% - % across the client base. Many of you already use Fastenal for safety and as we grow this category we would expect reductions for all. More details to follow. Logistics With FedEx coming out this week with an announced increase of 6.9% on LTL shipments and many other carriers to follow, now may be an excellent time to take a hard look at your freight costs through our sister company, Transportation Insight. Please contact us and we can facilitate a call or meeting with the industry experts.

9 Did you know? 92% of the benchmarks we ve conducted over the past 6 months have yielded savings for clients or prospects. Those savings averaged 16 19% depending upon the category and spend. Increase your savings You would call it additional bottom line savings, we call it organic growth. Regardless it s good for both of us. We just completed an audit of our client base and found there is an average of 5 categories per client that could be used but are not in place at this time. As we head into the second half of 20 we will be reaching out to all of our clients to discuss these opportunities. Let s get started together now so the savings can be in place and helping your bottom line by the time 2013 begins. We are also in the final stages of new improved reporting which you will be seeing in the quarterly and annual updates. We think you ll like it. As always, we welcome your suggestions for new categories and ways to make your company and our relationship better. Respectfully.United Sourcing Alliance 9