It’s easy to get caught up with a range of headlines in tracking the US economy. The Fed’s latest move (or planned moves) jobs numbers,CPI, PMI. The list goes on. But one economic factor will rise above all others for manufacturers in 2023: commodity price volatility spanning metals, resin, packaging, energy and more. And not only are we not in “a trend” in terms of commodity prices — the percentage variance between individual commodities, even in a single area, differs considerably.
Year over year price changes highlight the level of volatility across popular industrial metals, for example, especially when contrasted with their 3-month price change. Steel (hot rolled coil), aluminum and copper all saw significant year-over-year price changes of -42.28%, -17.55% and -9.05% respectively at the start of 2023. Yet in the past 3-months these changes actually moved in the opposite direction with steel up 6.83%, aluminum up 14.5% and copper up 11.43% (with even greater increases during that three month period before pullbacks in certain cases).
MetalMiner, a metals procurement technology provider which helps companies optimize supply and contracting strategies, shared the following chart with Surplus Record, to illustrate this volatility.
What’s driving such volatility in manufacturing commodities? According to a MetalMiner analysis for ISM, the primary drivers include, “a lower USD (as measured by the DXY), real supply constraints stemming primarily from the European energy crisis, political unrest and the easing of Chinese Covid restrictions along with technical factors including declining liquidity on the world’s most popular metal exchange, the London Metal Exchange (LME). Layer in lower import levels and the mix has created a metal price storm.”
The decline of the dollar by over 10% from a 20-year index high against major currencies from September to February is playing a key role. As MetalMiner notes, “commodities and the USD index have a broad inverse correlation. So as the USD has declined, commodity and many metal prices have traded higher.”
There are many reasons besides the rise and fall of the USD impacting the high degree of commodity price volatility in the manufacturering market. As noted, exchange traded metals including aluminum and nickel have been volatile for a range of reasons in addition but not limited to variable China demand based on the policy whims of centralized planning by the Chinese Communist Party (which as we’ve noted before on these pages, China is the single largest driver for industrial commodities and energy).
And in the US, steel prices, after their stratospheric run-up in 2022 owing to demand and import tariffs on foreign material — which not only fueled USX, Nucor and Cliffs top and bottom line, also helped thousands of line workers in the industry earn low-to-mid five figure bonuses last year — have changed course even as the US remains a somewhat protected market.
Managing through highly volatile commodity markets is likely to be the primary focus of manufacturers in 2023. This will require not only keeping a close eye on supply contracts and procurement strategy, but also customer contracts as well.
In the case of the former, combining price escalation/de-escalation clauses with supply strategies including balancing spot, short- and long-term contracting strategies for materials will be key. And in the case of the latter, any method of indirectly hedging price risk (e.g., similar escalation/de-escalation clauses or the actual hedging of commodites) for locked-in contract pricing will also be helpful.
Even if we are in a recessionary (and/or deflationary) overall economic trend in the US, manufacturers will be judged by investors in 2023 not just by how well they forecast demand and manage inventory levels, but how they manage underlying commodity price volatility.
Jason Busch and Lisa Reisman are Editors at Large of Surplus Record.
