Journalists might be frothing at the mouth at each revelation of the unfolding story of commodity volatility (I’ll excuse myself at this point, ahem) but there are plenty who are prepared to say that this is familiar territory.
So which is it? Perhaps you view the young bucks keen to make a name for themselves by buying in lots of extra capacity as a bit naive and even maybe a bit reckless in their rush to hedge everything. On the other hand you might see those who aren’t taking the current price escalation seriously out of touch.
Former Philips CPO Neil Deverill recently commented that “This will be the third, or is it fourth, global supply scare in my 40-odd years in procurement. But, in my view, it’s all a bit of a sham.”
Never one to shy away from saying it how it is, Deverill noted that “Until the world runs out of, say, oil or cadmium or wheat or perhaps rare earth, there will always be supply at a price, despite pundits predicting a global meltdown.”
Now, in balancing out this view I wouldn’t want to suggest that we’re talking about a global meltdown. But consider a few ideas:
First, look at Glencore, the largest commodity trader, about to make an estimated £12.1bn IPO. Numerous implications there, but you’d have to say that if they regard now as the time, after 37 years they decide to go public, perhaps that says something about the state of the commodity markets.
And of course, there’s the much larger shift of economic capability from West to East. More accurately, emerging markets are driving demand in such a way that even in markets experiencing supply dramas, even when that lifts, demand keeps pulling prices up.
Meanwhile there’s the implication that food prices are having. Surging agricultural prices are having the greatest impact in low-to-mid income countries and the unrest there is something that’s already been on show on several occasions this year. When you hear the sounds coming out of the IMF and World Bank, you’d have to say that they are taking commodity volatility very seriously.
Meanwhile there’s oil. I’ve read plenty of articles explaining (believe it or not) that the world has long exceeded its peak oil-producing capability. Though demand is increasing, we will never be able to make more oil than we can today, some says.
Again, oil prices going up are nothing new – I just wonder if there’s some degree to which the combination of events has the potential to make the ‘new normal’ (horrible phrase) a truly unfamiliar landscape.
So sure, many have seen a similar sequence of events before in the cycle. But my question is: is what we’re seeing today in the commodity markets anything like unique? And are commodity managers and procurement functions being too careful in their risk management strategies?