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February 25, 2016 - Supply Chain Flagship Newsletter

This Week in SCDigest

bullet The Collapse in Input Prices - What Does It Mean? bullet SC Digest On-Target e-Magazine
bullet Supply Chain Graphic & by the Numbers for the Week bullet Holste's Blog/Distribution Digest
bullet Cartoon Caption Contest Continues bullet Trivia      bullet Feedback
bullet New Expert Insight and Gilmore's Supply Chain Jab bullet Upcoming Videocasts and On Demand Videocasts


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first thought


Supply Chain Graphic of the Week
Carrier Operating Performance by Mode for 2015

US Truckload Rates Continue to Slow Amid Weak Volumes
Amazon Bumps Free Shipping Threshold Up, Maybe to Boost Prime
How Many New Locus Robots are Needed per Picker?
Container Growth Second Lowest Ever in 2015


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Week of February 15, 2016 Contest

See The Full-Sized Cartoon and Send In Your Entry Today!

Holste's Blog: Early Diagnosis & Treatment Is Key To Maintaining High Productivity Levels


Weekly On-Target Newsletter:
February 24, 2015 Edition

Cartoon, Picking Robots, Manufacturing Still Not Back, SOL Changes and more

What You Need to Know about the EU's Union Custom Code

by Suzanne Richer
Director, Trade Advisory Practice
Amber Road
Predictions for Procurement in 2016

by Chris Sawchuk
Global Managing Director and Procurement Advisory Practice Leader The Hackett Group


Remembering Supply Chain
Executive Ken Miesemer

by SCDigest Editor Dan Gilmore

New SCDigest Benchmark
Study on Global Sourcing & Trade Management


When did the word infrastructure first enter the vocabulary?

Answer Found at the
Bottom of the Page

The Collapse in Input Prices - What Does It Mean?


We are living in some very strange economic times.

We could start with the "new normal" of lukewarm growth (2% or so) seemingly every year in the US, and barely positive growth if that in Europe. Nothing seems to change that trajectory.


For the years before mid-2008, the corporate concern was on ever rising "input and logistics costs," often blamed for missing earnings targets. Now, this scenario is simply turned on its head.


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But that said, it seems like decent enough economic environment for most - so why is the price of everything collapsing?

I am going to let charts do most of the talking here, so let's start with oil. We all know the general story: oil was actually very steady in the $90-100 per barrel from 2011 through the first half of 2014, and then pow - a 70% or so drop to around $30 now for about three months. And of course, that is down 80% from $140 or so we saw in July of 2008. Chart here.

Diesel prices have followed suit, recently dropping below $2.00 per gallon for the first time since 2005. Where I am located in Ohio this week diesel was below gasoline prices per gallon - can't remember the last time that happened.

The same basic story for natural gas, where generally the price is lower in the US than most of the rest of the world. As you can see in this chart, natural gas prices have fallen from $6.61 per million BTUs in 2011 to about $1.75 currently - a decline of an astounding 74%.

Other commodities of all types are in retreat. The IHS Materials Price Index - which tracks a basket of commodities - is down about 60% just since July 2014, as shown below, and is now down past levels seen at the bottom of the Great Recession in 2009 to even lower 2003 levels - and yet we are not in a Great Recession.

As just a couple of examples of this outside of energy, you probably have heard of the collapse of steel prices, which have fallen by two-thirds since the $600 per ton level reached in early 2011 to about $200 today, as you can see here. Brutal. In June of 2008, the price was about $1265 - an amazing six times today's prices.

I don't have a chart, but many agricultural prices are also in the toilet. For example, wheat was $361 per metric ton in late 2012. It is now down more about 55% since then, at $164. It saw its all-time high of $439 in June of 2008 - nearly three times the current price.

Most of us know container shipping rates have also cratered, reaching modern all-time lows late in 2015, below variable costs to operate a ship and down by about 50% from 2012 levels, as you can see in the chart here that tracks the China Containerized Freight Index.

But perhaps the most astounding price story of all are the rates for bulk shipping of commodities, as is reflected in something called the Baltic Dry Index. In December 2013, that Index stood at 2330; it was at 290 this week- an almost unimaginable 88% decline.

What the hell is happening? Other things of course have held up - trucking and rail rates, for example, and thankfully wages for the most part.

But all this is wreaking much havoc, even if sometimes that pain is out of direct view. Oil-focused countries - most notably Russia - are facing economic disaster, and who knows what that will lead to. Commodity-dependent Canada quietly went into recession last year, and Brazil's economy is a mess. The whole US oil-natural gas fracking sector is in jeopardy - the growth of which had been a key factor in reaching just the modest 2% GDP growth we've seen in recent years.

The container shipping industry is madly consolidating. Bulk container lines are selling any asset they can just to "stay afloat" financially.

Steel giant ArcelorMittal lost $7.9 billion in 2015. Steel companies around the globe have been rapidly shedding workers. Steel sector employees - blue collar, managers, executives - just recently staged a mass march in Brussels to protest low cost Chinese imports they blame for the price collapse.

An article last week in the Farm Journal was headlined "Dilemma for U.S. Farmers: Which Crop Will Lose the Least Money?"
 Meanwhile,mining and agriculture woes are taking down great equipment companies like Caterpillar and Deere.

There are myriad and varying factors in all this, from a slowdown in Chinese demand (number one source of blame for most observers) to a strong US dollar to insane capacity growth in the shipping industry, etc.

But for the years before mid-2008, the corporate concern was on ever rising "input and logistics costs," often blamed for missing earnings targets.

Now, this scenario is simply turned on its head - and again, all this in decent economic times. What will happen if we do slide into recession? Could it get even uglier?

While lower gas costs are great for consumers, and lower input costs great for some (but certainly not all) businesses, I have to wonder if the markets - with prices worse than the bottom of the Great Recession - aren't telling us that an economic slowdown is indeed coming.


Maybe it is just supply and demand at its most brutal, but we've never seen prices collapse like this in relatively good economic conditions in our lifetimes.

What is your take on these collapsing prices? Good or bad thing? Do you think it is signaling coming economic weakness? Where do you see things going from here? Let us know your thoughts at the Feedback section below.

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We received a decent number of emails from our First Thoughts piece last week on Amazon - The Most Audacious Logistics Plan in History?. You will find a selection below - more soon.

Feedback of the Week on Amazon - The Most Audacious Logistics Plan in History?:


As someone who works for Amazon Global Logistics, I won't comment on the specifics in the Bloomberg article but what I will comment on is this: Amazon is committed to providing customers, regardless of their geographic location, with exceptional value, selection, and experience.

What we have identified within Amazon is that without an optimized end-to-end global supply chain ecosystem, and flawless logistics execution, we simply cannot meet our goals. Individuals who are passionate about all aspects of supply chain management, logistics, retail, and technology innovation, and who have a desire to make history, should explore career opportunities at Amazon. The challenges we have before us are enormous but for our Sellers, customers, and associates, the challenges will be overcome.

Brittain Ladd
Amazon Global Logistics


Of course this sort of "Vertical Integration" makes total sense. Why would any large company not want to control, and squeeze efficiencies from all parts of its supply chain. However we have seen many failed attempts in the past, think Ford River Rouge – perhaps companies get too atomic to control effectively - but most of those failures occurred before we had the real-time visibility to monitor everything globally that we have today with the internet.

Time will tell. My bet is that regulators in the various countries will provide Amazon with too much pain to allow them to achieve their grand vision. Competitors will be urging regulators to deny various options, and unless all of the pieces are in place from source to consumer the Tower of Amazon's Bable may collapse. Or maybe the genius team at Amazon will simple make a variant of the plan succeed.

Steve Murray


It is hard to know what is really going on here,  but if what you reported is accurate than I agree: yes this would be the most audacious logistics strategy in history.

The main thing I do not understand is why Amazon would want to enter the generally low margin logistics service provider market. The one thing I have to believe is that such a move would not be just for that business for its own sake, but rather to give it some advantage in its core business.

What would that be? That is the key question.

Also, will Amazon's competitors actually take advantage of this offering? That is another key question. There will be resistance, but if the cost or service/technology is better, they may just jump on board in the end. My guess is that after a few sign up, a flood of others will follow.

Rick Hinkel
Newport Beach, CA



Q: When did the word infrastructure first enter the vocabulary?

A: 1927, according to a new book on US infrastructure by Duke's Henry Petroski, but it really didn't catch on until the early 1980s.

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