How will the world of procurement change in 2017?
The year 2016 was a dramatic year for stock markets, world economies and the global population. We have experienced major political events, multiple acts of terrorism, a migrant crisis and, to top it all off, a number of iconic celebrities left us.
Nick Peksa, Procurement, 6 January 2017
While the majority of these have negative implications, there has been a lot of opportunity created in and around the supply chain; particularly when identifying requirements for future technologies, innovation and in the world of raw materials.
When looking at how the world will change in 2017, the big four areas that may affect us all are: the economy, currency, technology and raw materials.
Global economy: the world wanted change
The disenfranchised people of 2016 have spoken: they wanted change. Great Britain voted to leave the EU and the US supported president-elect, Donald Trump. Although the implications of these changes cannot yet be fully understood, we can be certain there will be a paradigm shift in the short term – after all, we are dealing with unprecedented change in two of the leading players in the world economy.
The growth rate of China has now stabilised at around 6.5%, while the US economic outlook appears to be positive. Europe is looking a little depressed, after the UK’s decision to leave the EU shook confidence across the eurozone. Coupled with the debt troubles of Greece and problems in southern Europe, there could be banking troubles ahead.
The key economic areas to watch out for in 2017 are:
- The collapse of Trans Pacific Partnership (TPP), and whether power will move to the Free Trade Association of the Asia-Pacific (FTAAP)
- Strengthening of the US dollar
- China’s commodity stock pile
- The Dutch (March), French (April) and German (autumn) elections
- Potential banking crisis in Europe
Currencies: a rollercoaster ride
In October 2016, the GB pound hit a 31-year low against the US dollar, and a six-and-half-year low against the euro, on fears over a ‘hard Brexit’ from the EU. Looking to 2017, we should expect to see slow and sustained GBP recovery against major currencies. Raw materials imports in the near future will remain expensive, with limited respite even with a recovering currency.
In December, the USD hit 11-month highs against the euro after the Fed hiked the interest rate. Two further interest rate rises are on the horizon to curb inflation and support the US recovery.
Throughout the new year, the global strength of the dollar will increase. This will benefit the US consumer initially, but could damage US exports and the economies of emerging nations heavily influenced by the dollar, including Turkey, Brazil and India.
On the back of this, key exports like chicken, hazelnuts, beef and spices will all be worth watching.
Raw materials to watch in 2017
In 2016 raw material prices have seen both spectacular increases (vanilla, coal) and sustained lows (corn, wheat). There are many more price movements on the horizon. In 2017, the overall trend for raw materials will be inflationary; prices will continue to rise.
Without a doubt crude oil will be the number one market to watch in 2017, as transport and energy can represent between 3% and 7% of a manufacturer’s costs. There is an expectation on the back of increased demand (stimulated by growth) and reduced supply (thanks to an agreement between OPEC and other major oil exporters to cut production) that crude oil may increase to between $55 and $90 per barrel. My prediction leans towards higher levels rather than the more conservative $55.
2017 prospect: Crude oil increases have the potential to add between 0.3 - 0.6% to cost base of the supply chain.
Sugar will see legislative changes come into force in autumn 2017. Back in 2006, a major reform of the EU’s sugar policy achieved simplification and greater market orientation. As well as trade measures, the EU policy covers three main areas: quota management, a reference price and a minimum guaranteed price to growers. The quota management will end as of 30 September 2017.
2017 prospect: EU sugar price will converge towards the world price and is expected to decrease by some 15%, with price changes passed onto the consumer. Imports are expected to fall by 44%.
Wheat and corn could be worth contracting in 2017. We have seen a long, sustained period of excellent production, carryover stocks are plentiful and planting acreage will be down. Any weather problems or an increase in demand for ethanol could see the markets move upwards globally.
2017 prospects: Wheat and corn face low risk but there is a potential for prices to start increasing across 2017.
EU steel prices have risen since the start of 2016, up 36% y-o-y, due to an increase in the cost of feedstock coking coal, supported by production cuts in China and import duties in the EU. Aluminum prices on the LME were up 17% y-o-y as demand in China remains strong due to an increase in automobile sales and higher demand from the building and construction industry.
2017 prospects: Continued price increases across the metals industry. Zinc may see the highest rises.
In 2017, myself and Mintec see a number of future technologies becoming a commercial reality. In 2016, artificial intelligence (AI), robotic process automation (RPA), predictive analytics and blockchain all trended highly. Having spoken extensively to our global client base, we have identified that predictive analytics is heavily in demand with respect to raw material pricing; 2017 will see some significant developments in this field.
By making the markets more transparent and taking the menial, repetitive tasks out of the supply chain, technology will allow innovation and collaboration to flourish.
Just a drop of water in an ocean of time
Right now it may seem like the world is in chaos, buildings are on fire, and raw material prices are spiraling out of control. However, remember to take a step back and, instead of panicking about the short term, let’s look towards 2020 by embracing opportunity, technology, innovation and, most of all, our customers.
To put everything into perspective, in a couple of decades when we turn to the pages of a history book, we will read: Britain changed its trading agreements, the US elected Donald Trump as their 45th president and commodity prices will not even register as a footnote.