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From SCDigest's On-Target e-Magazine

- Feb. 26, 2014 -

Supply Chain News: Input Costs Likely to Decline Again in 2014, World Bank Says

Prices in Most Commodities to Fall Again after 2013 Drop, and Risk is Mostly to the Downside, Agency Says

SDigest Editorial Staff

Commodity prices are likely to continue to remain weak throughout 2014, the latest analysis from the World Bank predicts - continuing the sharp break from the commodity price bubble the word saw prior to the recession starting in 2008.

SCDigest Says:

Just one thing relative to commodity price predictions is clear, and that is that no one really knows, but companies need to place their bets nevertheless.

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With the exception of energy, the World Bank says all the key commodity price indices declined significantly in 2013 versus 2012:

• Fertilizers: -17.4%

• Precious metals: -16.8%

• Agriculture products: -7.2%

• Basic metals: -5.5%

Crude oil prices, however, have been remarkably stable on average during the past three years, though with some decent swings within any given year. Oil (Brent crude) averaged $104 per barrel during 2013, just below the $105 barrel average of 2012.

Most non-energy commodity prices, notably grains, followed a downward path during 2013, as shown in the graphic below. After rebounding from recession-driven lows in 2009, commodity prices across all categories started flatlining in 2011 and then declined in 2012 and 2013, according to World Bank data.

Below are some predictions from the World Bank by commodity category.

Energy

The World Bank expects oil prices to average $103/bbl during 2014 (down from $104/bbl in 2013) and decline to $100/bbl in 2015. In the longer term, prices in real terms are expected to fall, due to growing supplies of unconventional oil, efficiency gains, and (less so) substitution away from oil. The key assumption underpinning these projections reflects the upper-end cost of developing additional oil capacity from Canadian oil sands, currently estimated at $80/bbl in constant 2014 dollars.

In natural gas, the World Bank expects prices in the US to remain low relative to crude oil as well as relative to European and Japanese natural gas prices, though it does expect some level of "convergence" to take place. Right now, natural gas sells for around $4.00 per thousand cubic feet in the US, versus about $12.00 in Europe and some $16.00 in Japan.

World Bank Commodity Price Index

Basic Metals

The overall metal price index is expected to decline 2% in 2014 and 1% in 2015 as more supplies come on board. However, this average masks variations among individual metals. For example, the prices of aluminum, copper and nickel are expected to decline the most in 2014, very little change is expected in iron ore and lead, while tin and zinc prices are expected to increase 1 and 5%, respectively.

Most price risks are on the downside, however, and depend mostly on the path of the Chinese economy, the World Bank says.

(Sourcing and Procurement Article Continues Below)

CATEGORY SPONSOR: SOFTEON

Precious Metals

The 2013 weakness in precious metals prices is expected to persist and the index is expected to average an additional 13% decline in 2014 (with gold, silver, and platinum down by 14, 12, and 6%, respectively), as institutional investors will continue to consider them q less attractive "safe haven" versus alternatives. Prices are expected to stabilize in 2015 and decline 1.8% for the year.

Most risks are on the downside due to the tapering of bond purchases by the US Federal Reserve and likely increases in interest rates.

Fertilizers

This category experienced a five-fold increase in prices between 2003 and 2008, and is highly tied to natural gas costs - some fertilizers are made directly out of natural gas.

It is expected that fertilizer prices will ease again in the medium term, after a sharp drop in 2013. The World Bank's fertilizer index is expected to decline 11.7% in 2014 and additional 1.4% in the two years thereafter, which comes on top of last year's 17% decline. Among the individual components of the index, phosphate rock is expected to decline about 25% in 2014, followed by TSP (down 16%), DAP (down 12%), potash (down 10 %), and Urea (down 4%). This outlook is based on the assumption that U.S. natural gas prices will increase at a moderate pace (due to stronger demand).

Agriculture

Agricultural commodity prices are projected to decline 2.5 % in 2014. Food commodities are expected to decline by 3.7%, followed by (-2%). Raw materials will increase marginally (+0.9%). The largest declines among food commodities will be in the grain group with maize, rice, and wheat down by 13, 9, and 4%. While edible oils and meals will change little at the aggregate, palm oil and soybeans are expected to increase by 4 and 2% while soybean oil and soybean meal will decline by 3% each.

Of course, much of this is all intertwined. For example, predictions for agricultural prices are directly tied to expectations for fertilizer costs. If they were to rise above predictions, than agricultural prices likely will too.

Below is a table of Word Bank commodity price changes for 2014 and 2015 in coming years (and history for the past few years), based on an index year of 2010.

China remains a wild card in nearly every commodity category, but especially metals. Agriculture commodities are heavily influenced by weather and trade policies.

Just one thing relative to commodity price predictions is clear, and that is that no one really knows, but companies need to place their bets nevertheless. This World Bank data is as good as any.

The full World Bank report is available here: Commodity Markets Outlook 2014

What's your take on the World Bank commodity predictions? Let us know your thoughts at the Feedback button or section below.

Recent Feedback

Predictions suggest that input cost will be under control or would go further down. That is a good news for corporations that are already having lower revenue growth.

On the other hand it also suggests that overall economic activities would remain subdued, which is not good for the world economy. So far as India is concerned, agricultural commodity prices continued to remain high despite the good crop forecast, and I do not see it is going down in near future.

However, we have experienced that our standard predictions have not helped us in the past. We continue to have a lot of uncertainty and a state of flux in economic activities and political institutions, so we have to be careful and keep revisiting our plans as and when new indicators appear on the economic landscape.

Mohd Mateen
VP (F&A)
Berger Paints India Ltd-British Paints Division
Mar, 01 2014