Commodities Update February 27, 2015

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1 1 United Sourcing Alliance actively monitors market pricing as a service to our clients and 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 gsmith@usa-llc.com or Ext 14 if we can assist you further. Commodities Update February 27, 2015 ISM Report on Business The manufacturing sector has expanded for the 20 th consecutive month as the Purchasing Managers Index (PMI) for January 2015 came in with a reading of 53.5%. A reading above 50% generally indicates expansion. The New Orders, Production, and Employment Indexes continue to indicate that most industries are seeing a solid start to Of the 18 industries that participate in the monthly survey 14 reported growth in January. The ISM Price Index comes in at 35.0% in January, down 3.5% from December. Of those participating in the ISM report: 11% reported paying higher prices, 48% reported paying the same, and 41% reported paying lower prices. Heavily influenced by petroleum markets commodities reported to be down in price are: Plastic Resins, Polyethylene & Polypropylene Products, Gasoline, Diesel, Natural Gas, Stainless Steel Products, Hot Rolled & Cold Rolled Steel, Brass, and Copper. Reported up are: Corn Based Products and Electric Components. Nothing is currently being reported as in short supply. ISM Commodity Price Index 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 Ethylene markets continue to be in a better supply position than our previous report as production remains high and inventory levels increase. Some of the cracker operations that were previously down have come back online and some of the planned outages have been postponed. The improved supply position coupled with lower oil prices have led to significantly lower spot ethylene prices. A 16 cent decrease over the past 5 months and another estimated decrease for March and April will take us back to late 2012 / early 2013 levels. But even when you consider these decreases producers continue to make good money. We look for pricing to remain flat the balance of All PE grades (HDPE, LDPE, LLDPE) saw January contract prices fall by 4 cents and another 5 cents in February. That represents a total decline of 16 cents, or approximately 18%, over the past 4 months. With such dramatic decreases we are led to ask if 16 cents is enough or have we reached the bottom yet? The answer to that question is dependent on crude oil prices and as we all know that is a hard one to forecast. In January oil prices were 55% lower than June 2014 levels, and despite a slight rebound recently there is reason to believe prices will continue to be depressed. There is a global glut in supply and without some significant production cuts that glut will remain. With crude oil prices staying low, most industry experts are forecasting additional PE price reductions for March and April. Look for a total of 5 cents per pound that would likely be spread over the 2 month period, perhaps 2 cents one month and anther 3 cents the next. Looking ahead we would expect fairly flat pricing throughout the balance of 2015 with a rebound likely to come in Operating rates will bounce back as U. S. prices become more competitive with the world allowing for increases in exports. LLDPE Prices Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Charts are also available for LDPE & HDPE. Contact Gene Smith if you would like those.

3 Corrugated Containers U.S. box shipments moved higher in the 4 th quarter after a flat first 8 months, finishing the year with a gain of 1.2%. All indicators point to continued gains in box demand as nondurable goods such as food, beverages, pharmaceuticals, cleaning products, and cosmetics continue to rebound from 2009 levels. Other factors contributing to growth will be improved consumer spending, construction growth, durable goods output, and continued growth in online shopping. As we look ahead into 2015 and beyond, box shipments should continue to increase with food & beverage markets leading the way. This segment accounts for approximately 50% of the corrugated market and above average gains are expected for produce, meat, seafood, dairy, and beverages. Durable goods, such as appliances and furniture, are expected to rebound as construction spending increases. This rebound in durable goods will also increase the demand on corrugated packaging. The non-manufacturing markets are expected to be the fastest growing over the next 3 to 5 years as online shopping continues to gain in popularity. Another development has been the increasing restrictions on foam containers for food which will likely lead to a greater use of boxes in the food service business. Value added types, such as display and high quality graphic boxes, will continue to grow and provide companies with a relatively low cost point-of-sale option. As the corrugated box continues to dominate markets as the shipping container of choice, look for end users to pursue lighter weight, high performance paper grades, as a way to lower costs. These high performance paper grades will allow you to lower the basis weight without sacrificing compression strength. If you haven t taken a look at your box specifications in a while give us a call: we can likely help. Our visibility into the market place and working across multiple industries gives us additional insight. 3 U. S. Box Shipments With linerboard pricing remaining at $790/ton we are 22 months since the last move. We will continue to monitor and report should a significant change occur.

4 Parcel Rates The previously announced rate increases and the change to dimensional pricing all went into effect in January and most of you are seeing the results with significantly higher pricing. You can also see from the Bureau of Labor Statistics, both parcel and LTL were pain points even prior to these recent changes. 4 Chances are your shipping costs have been impacted by these changes which in turn will impact your bottom line. We have experts on hand who can assist you in navigating the complexity of this world while likely lowering your costs. Reach out to us and we can arrange for a 15 minute call to address your questions. Steel For year ending 2014 shipments from U. S. Service Centers were up 4.2% compared to Steel imports were up 38% over this same time period. U. S. domestic raw steel production was down in January compared to prior year and exports were expected to be down roughly 6% for 2014 with December numbers still to be finalized. The significant increase in import numbers has all major domestic manufacturers raising complaints and seeking higher tariffs. You may be surprised to learn that when looking at the top 5 raw steel producing countries the U. S. ranks third: 1. China 2. Japan 3. United States 4. India 5. South Korea Energy Outlook January was the 7 th consecutive month of declining Brent crude oil prices averaging $48 per barrel, representing a decrease of roughly 50% since 3 rd quarter 2014 and the lowest since March of Projection for the 2015 yearly average is at $58 per barrel. A recent report cited high domestic production rates and expanding inventories as contributing factors to a potential $40 per barrel price within the next 3 months.

5 The monthly average for retail regular grade gasoline was $2.12 per gallon in January which was down 39% from October closed with a yearly average $3.36 per gallon and the latest prediction for 2015 is for a yearly average of $2.33. Looking out to 2016, prices are expected to bounce back up to a yearly average of $2.73. Keep in mind that these markets are extremely volatile and the monthly averages in some regions can exceed the national averages by $0.30 per gallon or more. 5 $4.50 U. S. Gasoline & Crude Oil Prices $4.00 $3.50 $3.00 $2.50 $2.00 Gasoline Crude Oil $1.50 $1.00 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 *Source US Energy Information Administration Jul-13 Oct-13 Jan-14 The 2015 forecast for on-highway diesel fuel retail prices, which averaged $3.83 per gallon in 2014, is significantly lower at $2.83. Six months ago the on-highway diesel fuel retail prices report was showing 2015 predicted yearly average of $3.82, showing how volatile and unpredictable these markets can be. Currently the projection for 2016 stands at $3.24, for what it s worth. Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 *Source US Energy Information Administration

6 Natural gas production reached record levels in November 2014, and despite cold weather supply levels remain high and prices have fallen. The Henry Hub natural gas spot price is expected to average $3.34/MMBtu this winter compared to $4.53/MMBtu last winter. The projected yearly average has been adjusted down significantly from the October 2014 report and currently stands at $3.05/MMBtu. This would represent a reduction of 30% compared to the 2014 average of $4.39. Looking way ahead into 2016 the current projected yearly average stands at $3.47/MMBtu. 6 *Source US Energy Information Administration Office Supplies As reflected in the U. S. Producer Price Index the cost associated with office supplies has outpaced the general rate of inflation over the past five years. But United Sourcing Alliance has been successful in holding down the impact to our members and in most years have lowered overall costs. Some items have increased but through successful negotiations with our providers and managing our Master Core List we, as a group, have seen below market pricing. Office Supplies should not be an area of concern for you and we can help in connecting you with our group s provider. We will benchmark for initial savings and give you the assurance of below market pricing through on-going management of this category.

7 Currencies The U.S. dollar has continued to climb as investors look to the American economy as improving when compared to other world economies. Investors also like the safety of U. S. Treasuries which pay higher yields than other countries. A stronger dollar reduces the cost of imports while increasing the cost of our exported products to foreign countries. 7 2/25/15 Rate/US$ 3 Month chg Brazil real % Canada dollar % México peso % Euro area euro % UK pound % China yuan % India rupee unchanged Japan yen % Know the numbers and use them to your advantage. ECONOMIC NEWS At A Glance 2014 GDP increased 2.4% Disposable Personal Income increased 2.1% Personal saving rate was 4.6% Q Prices of goods & services increased by 1.4% For 2014 GDP increased by 2.4% compared to a 2.2% increase in Primary positive contributors to the increase were consumer spending, business investment, and increasing exports. The consumer confidence index in January rose to its highest level in 7-1/2 years with a reading of Consumer spending increased 4.3% in the fourth quarter with both goods and services showing gains. Durable goods increased by 7.4%, non-durable by 4.4%, and services increased by 3.7%. The U. S. budget deficit ended the year at $488 billion which represented an improvement over 2013 of $72 billion. Fueled by an increase in tax revenue and a reduction in defense spending, this deficit was the smallest since Housing New single family housing starts hit a seven year high in December with annualized rates hitting 728,000 units. For full year 2014 housing starts increased by almost 9% to over 1 million units. This included both multi-family and single family housing.

8 Sales of new homes also increased in December reaching an annual rate of 481,000 units which marks the highest total since June of Existing home sales were back up in December but closed down 3.1% for the year as a whole. This was the first annual drop in four years and indicates the market continues to struggle in maintaining momentum. First time home buyers still have not come back. U.S. Auto Sales All the major automakers posted solid, double digit gains in January with 1.15 million units sold. General Motors led the way up 18% in January and up 2% for the entire year 2014 in units sold. Light duty truck sales showed very nice gains as gas prices fell. Ford has just recently announced the hiring of an additional 1500 workers to support the F150 production. This is a welcomed turn around by Ford who has struggled with higher costs and lagged competitors in recent months in preparation for the new F150. Employment An estimated 250,000 jobs were added in January as employment recorded a 19 th consecutive month of growth. The ISM employment index for January came in with a reading of 54.1% with half of the industries participating in the survey reporting growth. The only four industries reporting losses were: Nonmetallic Mineral Products, Computer & Electronic Products, Transportation Equipment, and Machinery. 8 UNITED SOURCING ALLIANCE family of Companies LEAN APPLIED TO LOGISTICS AND TRANSPORTATION PROCESSES In the latest issue of Inbound Logistics magazine, Transportation Insight client L.B. Foster sites the dynamic effect of our LEAN expertise on their logistics and transportation processes. The article entitled, Building a Bridge to Continuous Improvement highlights how the Pittsburgh-based company has been transformed from a company struggling to place freight to one that can place as much as it needs quickly and efficiently. Most notably Arnie McCauley, Material Services Manager at L.B. Foster points to the importance of our understanding of LEAN. He states Transportation Insight was the only [3PL] that answered in terms of process improvements. They know what continuous improvement is all about." McCauley also points out our associates. The difference between Transportation Insight and other providers comes down to people," says McCauley. "Their people have grown and changed over the five years since we implemented the solution, but they've consistently looked at our business with an eye toward helping us improve. They rose to that challenge." Please feel free to read the full article at the following link.

9 9 SOURCING OPERATIONS UPDATES Service Offerings Some of the most often overlooked areas when considering indirect costs and the impact to your company are the service categories: janitorial services, staffing, maintenance, shredding, waste services, just to mention a few. What you may not know is that United Sourcing Alliance has very strong supplier partners for all of these. Many clients have elected to participate in some of these but the service categories remain the most underutilized across the group. For those of you that have implemented, you are likely surprised by that statement given the success and the savings you have enjoyed through our group solutions. As part of our annual reviews we will be sharing additional information on each of these categories as well as the utility and telecom audit solution. The good news, in addition to the savings potential, is that there is little work for you in terms of data collection. The heavy lifting rests on the suppliers and the analysis they provide to document savings. Please give careful consideration to these as we conduct annual reviews. Office Products A recent announcement has Staples acquiring Office Depot for $6.3 billion which, if approved, will create a $39 billion sales entity with approximately 4000 stores. Most comments center on competition in a consumer environment but seem to look past the lack of competition in the B2B world in which we all operate. United Sourcing Alliance has expressed our concern to those who will ultimately vote this up or down, and we will continue to look out for the best interest of our member clients. While our contractual position with Office Depot is secure, we will continue to search out alternative solutions in the overall best interest of our clients. As you can see from the office products information shared on page 6 of this update, we take your office products spend very seriously and have continued to keep our clients well below what is happening in the market. We will continue to do so as we explore other potential solutions and as we discuss strategies with other large corporations and groups. Logistics If you are looking for help with logistics and are interested in a hosted web based technology solution, talk to us about our sister company, Transportation Insight or check them out at Transportation Insight s offerings and services are categorized into four primary areas: co-managed logistics, technology, financial settlement, and business insight. If you feel that your domestic truckload, LTL, or parcel logistics need a look, let us know and we can arrange a meeting with the subject matter experts. Whether it s your indirect materials, logistics, or Lean practices, we re here to help make your company more cost efficient. Let us know what else we can do for you. Respectfully.United Sourcing Alliance