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By: Sean Windle
Every quarter, IBISWorld puts together a macro update identifying the most significant trends impacting procurement and supply chain professionals. These updates include a brief overview of commodity prices, noteworthy mergers and acquisitions, changes in government policy and regulation, as well as major trends driving specific industries and markets.
Weak Recovery Ahead for Commodity Prices
During the past three years, the prices of major metals have been falling due to oversupply and weak global demand. For example, steel and copper prices have both been falling at an estimated annualized rate of 5.3% from 2014 to 2017, with aluminum prices declining at a more marginal rate of 0.4%. Declining metal costs have had a tempering effect on prices for a number of different metal-based products and services, including sheet metal, steel wire, security wire fencing and metal casting services.
In the three years to 2020, copper and aluminum prices are forecast to rise, albeit slowly. IBISWorld forecasts that copper prices will increase at a subdued annualized rate of 0.6%, with aluminum prices increasing at a slightly faster annualized rate of 1.6%. Higher costs for copper and aluminum inputs will ultimately be passed down to buyers; however, the slow pace at which these input costs are projected to rise will also help keep prices for metal-based products and services from increasing too quickly. On the other hand, steel prices are forecast to continue their descent, falling at an annualized rate of 3.4% from 2017 to 2020. Given that steel prices are expected to continue tumbling, and growth in copper and aluminum prices will be weak to moderate, buyers of metal-based products and services will maintain significant pricing leverage heading into 2020.
Oil prices are also set to return to growth after plummeting during the past three years. From 2014 to 2017, IBISWorld estimates that the price of crude oil has been plunging at an estimated annualized rate of 17.7%. This drastic drop is due to oversupply and weaker global economic growth, and it has fueled price declines for a number of markets in which oil is a major input, including gasoline, lubricating oils, hydraulic oil and even vehicle transportation services. However, this trend is set to reverse during the next three years, with oil prices set to rise at an annualized rate of 3.0% due to OPEC-led production cuts and stronger global demand. Rising oil prices will fuel higher prices for buyers of oil-based products and services; however, oil prices will remain historically low. For buyers, this means the price of gasoline and other oil-based goods will also remain subdued.
The Oil and Gas Sector Embraces Big Data
Much has been said about the merger of General Electric’s oil and gas business with Baker Hughes, which was completed earlier this month. The partnership will generate $32 billion in revenue, making it the world’s second-largest oilfield services provider behind Schlumberger. The complementary nature of the companies also creates a competitive advantage; GE is an oil and gas equipment manufacturer, while Baker Hughes is an oilfield services provider.
The deal also illustrates a broader trend among oil and gas companies: the increasing utilization of big data to reduce costs, improve safety and strengthen market position. In addition to heavy industrial equipment and machinery, GE is contributing its big data analytics. For example, Baker Hughes, which now operates as a subsidiary of GE Oil and Gas, will have access to a variety of data analytics tools, including software and a team of 600 data scientists. These tools will allow both companies to more easily collect, manage and analyze data concerning drilling and production, asset performance, prospective oil and gas sites, equipment failure and much more. GE will be able to combine its downstream manufacturing and energy businesses with Baker Hughes’ upstream oil and gas operations and midstream transportation services. Essentially, GE will become the world’s first full-stream services company.
GE and Baker Hughes aren’t the only energy companies using big data either. For example, Shell has an agreement with Hewlett-Packard, in which the latter provides the oil and gas conglomerate with a variety of IT hardware and networking services to process the massive amount of data gathered from surveying potential drilling sites around the world.
Plummeting oil prices are partly driving the oil and gas sector’s big data embrace. While the agreement by OPEC last year to cut production has led to a modest recovery, IBISWorld does not expect oil prices to reach anywhere near their pre-crash levels in the next three years.
Oil and gas exploration is also expensive. When you factor in the cost of securing land rights, equipment costs, maintenance expenses and payments to engineers, contractors, geologists and other personnel, it ranks as one of the world’s riskiest ventures. What’s more, this risk level will only increase as easily recoverable oil supplies are depleted and companies increasingly rely on unconventional shale or deepwater wells, which are harder to find and develop. IBISWorld expects more oil and gas companies to lean on big data solutions in an effort to cut costs, mitigate risks and bolster profit during the next three years.
Truck Carriers Brace for ELD Mandate
Beginning this December, truck carriers will have to comply with a new federal regulation mandating the use of electronic logging devices. The rule is meant to reduce the number of accidents involving large trucks and buses. While ELDs will reduce burdensome paperwork, they are also expected to exacerbate the existing driver shortage and increase labor and compliance costs for carriers. These factors will contribute to an expected 6.2% price surge in 2017 for national and local trucking services.
Higher Interest Rates on the Horizon
In the aftermath of the Great Recession, the Federal Reserve slashed interest rates to near zero to spur economic growth, which is where they’ve remained for most of the past decade. Only recently has the Fed begun to raise interest rates: a quarter-percentage hike at the end of 2015 and 2016, followed by another quarter-percentage rise in June. These moves put the current federal funds rate between 1.0% and 1.25%.
IBISWorld expects these gradual rate hikes to continue during the next three years as the Fed tries to curb inflation. Moreover, with the economy growing, the Fed needs room to be able to lower rates again when the next recession strikes.
Although gains will be incremental, rising interest rates will make it more expensive for businesses to borrow money, which makes it harder to expand operations through the purchase of industrial machinery and other large capital goods. During the past three years, it’s been easier to finance such goods; however, to hedge against higher interest rates, buyers will want to make more strategic purchasing decisions. Buyers can procure loans now to lock in lower rates, or they can consider leasing options for major capital goods. Buyers can also leverage their credit history to get a lower rate or more favorable contract terms. For example, buyers can negotiate a rider, which is essentially a reduction in the amount of collateral required. Additionally, business credit card services, equipment financing services and other lending markets are fairly competitive, with suppliers vying for business. Buyers can use this market competition to their advantage.
While interest rates are rising, they are still well below the historical average of about 5.0%. Moreover, given the cautiousness with which the Fed is raising them, rate hikes would likely cease or be reversed at the first indication of a recession. Nonetheless, by thinking more strategically now, buyers can lessen the impact of rising interest rates during the next three years.