Thursday 27th Jul 2017 - Logistics & Supply Chain

Blowing bubbles

The headline to this has been the surge in wheat prices following Russia’s decision to halt exports and supply only its home market from this year’s poor harvest. But with markets it only needs one piece of bad news to set off a stampede. Wheat prices (at the time of writing) are up 75 per cent on the start of the year.

Equally significant, other commodities have started to rise inexorably. The food prices index produced by the International Monetary Fund rose from 139 to 143 between March and July (the latest figures available), from a base of 100 in 2005. The beverage index, which covers the price of tea and coffee, was up from 163 to 178 over the same period. The metals index was volatile – it rose from 156 to 176 between March and April before falling back to 155 in July.

And, to top off the bad news, the price of oil has been edging upwards following BP’s troubles in the Gulf of Mexico and the resumption of stronger growth in the world economy. All this ought to prompt some careful strategic thinking in the boardrooms of any company that moves large quantities of any of these (or other commodities, for that matter) around the globe. For the fact is that the shape of world supply chains has been changing – and will change even more in the future.

The historic model was of supply chains moving raw materials from the developing world of Asia and Africa to Europe and North America with manufactured goods being exchanged between the advanced economies and exported to the developing world. The new shape of world supply chains is much more complex – with raw materials often being exported from developed countries to the developing ones.

So what? Moving goods from anywhere to anywhere was always the supply chain’s business. What’s different about the new model? Well, potentially quite a bit.

For a start, the political intervention to stop wheat exports in Russia suggests that global supply chains could, increasingly, be prone to more The reshaping of supply chains is an opportunity for those organisations with the global reach to take advantage of it.serious political interventions in the future. Of course, we’ve seen geopolitical interventions in supply chains in the past – most notably back in the bad old days of the 1970s when OPEC sought (successfully) to hike the price of oil.

But, today, it’s not just oil that conceivably could be in short supply – but a whole host of commodities from coffee to potash. The new economic reality, which is only beginning to dawn on the West, is that the rise of the so-called BRIC economies – Brazil, Russia, India and China – is going to create more competition for everything. And, in some cases, those everythings will be in continuing short supply – or subject to volatility.

So, in the light of all this, what issues should those boardroom discussions focus on? The first, surely, is the shape of supply chains. They’re changing as demand for commodities moves from Europe and North America to the BRIC economies. Much more of Canada’s potash, for example, will be exported to China in the future.

The reshaping of supply chains is a strategic opportunity for those organisations with the global reach to take advantage of it. But many will find it difficult to tackle the cultural and regulatory issues which moving into unfamiliar markets brings with it. One solution to those problems is to look for appropriate joint venture partners.

The second issue is that the ever-rising demand for commodities of all kinds will tend to keep prices rising. Of course, there will be peaks and troughs as the metals index has demonstrated – but the trend is going to be northwards for most things. This means that consumers of commodities are going to be looking to cut costs more vigorously in other areas – including transport and distribution. Logistics professionals who can harness new technologies and devise new working methods that trim expense while maintaining service levels will gain competitive advantage in this climate.

Finally, all this will happen at a time when the world is becoming concerned about the toll that producing more commodities than ever, and moving them around the globe, is taking on the environment. So cheap and dirty solutions – which, let’s be frank, have sometimes served their purpose in developing markets – will, increasingly, be inappropriate. When it comes to transport and distribution of pretty much anything these days, clean and green is the new mantra.

Perhaps the commodity price bubble will burst. Certainly, there will be more price volatility across more commodities. But don’t bet on prices falling in the longer term. It’s basic economies – when demand increases for scarce products, prices rise. That’s the big issue which logistics professionals now need to face.

 

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