Procurement

Buyer's Market to Continue in 2015 with Growing U.S. Economy

Nov 20, 2014

Polyethylene resin.

Polyethylene resin.

Heading into 2015, procurement and supply leaders can feel good about the economy and commodity prices. That's the word from the IHS executives and analysts who led presentations at the IHS Pricing & Purchasing Summit held recently in Washington, D.C. More than 150 procurement and supply leaders attended the event hosted by the global market information and analytics company.

Although there are concerns, there are also many reasons for optimism, Nariman Behravesh, chief economist at IHS, explained in the opening keynote, "The Global Economic Outlook: Are We Facing a Lost Decade?" Among the reasons for optimism: lower oil prices which could boost growth in 2015. "We are fairly upbeat about the U.S.," Behravesh said, adding that IHS expects the global economy to grow 2.5 to 3 percent next year. He used the purchasing managers index (PMI) for the U.S. and other regions to show attendees the positive changes in the economy. The U.S., China, Eurozone, and Japan all have readings at or above this figure.

Nariman pointed out that U.S. oil production, which is booming, is lowering prices and stabilizing global markets while demand for oil worldwide, especially from China, remains soft. Saudi Arabian production remains steady. Wildcards are a slow-moving OPEC and rising geopolitical tensions, but IHS sees prices likely remaining in the mid $80s per barrel for Brent and in the mid $70s/bbl for WTI, two common benchmarks.

Confidence carried over into the other sessions at the IHS event. John Mothersole, director of research and lead nonferrous metals analyst at IHS, asked a question in the title of his presentation, "Global Pricing Environment: Is the Buyer's Market Finally Coming to an End?" His answer is good news for procurement: not anytime soon.

While oil prices are contributing to lower costs for some commodities, a slowdown in the economies of other regions of the world, most notably, China, is playing a larger role, Mothersole said. In the recent past, strong growth in the region led to tight supply and higher prices for some commodities. "Unlike other post-war recoveries, the shift away from buyers has barely begun," he said. Demand has not fully recovered, Mothersole said, suggesting that the transition away from a buyer's market will begin in 2016-2017. "Then, conditions will set up to shift leverage to suppliers."

Opening the event, Laura Hodges, director of pricing and purchasing at IHS, welcomed the procurement and supply leaders to the Pricing & Purchasing Summit. This year was the first time IHS held several of its related events at the same time and at the same venue. Also held that week in Washington were the MRO Customer Symposium, the Global Economics & Country Risk Conference, and the EHS & Sustainability Solutions Workshop. Having four events under one roof provided additional opportunities for the 500 participants to network and share best practices.

Steel Forecast Daring

At a breakout session, John Anton, principal economist for steel and ferrous metals at IHS, began his presentation, "Steel: Chaos for 2015 Masks a Long-Term Buyers' Market for 2016 and Beyond," with the caution: "My forecast is daring, although it isn't meant to be. It's what I think will happen." He highlighted that his colleague Mothersole's outlook for a continuation of the current buyer's market does not apply to steel market in 2015.

To Anton's point, he said that he sees steel prices rising next year because mill bankruptcies will cause tighter supply. At the same time, he said mill closings will also cause delivery disruptions. He suggested in the next two to four months that procurement leaders who purchase steel lock in prices for 2015. Longer term, the market will loosen up again, he said, with another five to 10 years of a buyer's market, "not a happy long-term forecast for producers."

Howard Rapport, senior director of chemicals at IHS, led off the session, "Plastics and Polymers: The Power of Supply and Demand," with a brief recap of remarks he made in an earlier session on the market for feedstock chemicals, ethylene, and propylene. Depending on oil, and some other other factors, buyers may see steadier or lower prices for these commodities next year.

Daniel De Castro Gomez, senior economist for chemicals at IHS, then dived into the market outlooks for polyethylene and polypropylene. The bottom line for polyethylene, he said, is a continued seller's market through 2015 and into 2016, with prices, margins, and operating capacity all remaining high.

For polypropylene, De Castro Gomez said he doesn't expect any relief for buyers any time soon. In North America, he said prices are at historical highs, outages will continue to be an issue, and more hikes could be coming in 2015.

For PVC, polystyrene, nylon 6, and PET, Rappaport said he sees less price volatility with perhaps some lower prices if energy prices continue to decline.

Other breakout sessions covered markets for olefins (ethylene and propylene), construction materials, agriculture (global, U.S), base and precious metals, and construction labor.

In her presentation, "Global Sourcing Risks: Results from the 2014 Survey," pricing and purchasing director Hodges examined current sourcing trends, based on input from more than 500 procurement practitioners.

Hodges said that she often hears a question from IHS clients, "What's next?" meaning which countries are procurement leaders considering when developing sourcing strategies. While results of the third annual survey show that China is the largest U.S. trading partner (a significant shift from as recently as 10 years ago, when Canada was the largest U.S. partner), Hodges said that procurement leaders are starting to move their purchases back to the U.S.

"Companies are pulling away from China because of the favorable cost environment and lower risk of doing business in the U.S.," she told session attendees. Other regions that interest procurement leaders include Vietnam and Mexico.

A customer panel, "How are Clients Using our Price Forecasts and Analysis?" featured procurement and supply leaders from RiteAid, Harley-Davidson, Suncor Energy, and CB&I.

The IHS Spectrum Excellence Awards shined a spotlight on organizations and individuals around the world who enable better business decisions through innovative use of information, analytics, and expertise. At the dinner, IHS recognized 10 of its clients, including procurement teams at two that use its Pricing & Purchasing Service: Cardinal Health and Cargill.

A training track during the Pricing & Purchasing Summit included sessions that showed attendees how to use IHS tools. Among the sessions offered were "Using the Cost Analyzer to Your Advantage" by John Scholle, senior economist for transportation services at IHS; "Supply Chain Resiliency: From Insight to Foresight" by Paul Hunt, director of product management for global economics at IHS; and "Having Confidence in a Volatile Pricing World" by KC Chang, senior economist for nonferrous metals at IHS.

Procurement and supply management attendees also had the opportunity to speak with analysts in one-on-one meetings. They visited a customer care area where there were experts on hand to answer questions on the IHS Data Insight Web search and retrieval tool and the IHS Cost Analyzer and Purchasing Analyzer wizards.

This article was originally published at My Purchasing Center and has been republished with permission. For more stories, visit MyPurchasingCenter.com.