Threat of trade war hits global procurement industry

21 June 2018 5 min. read
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With a growing level of concern expressed by experts at a potential global trade war, a new research paper has warned that the procurement industry is facing a coming storm in coming years. The pricing of key commodities has spiked dramatically since the announcement of harsh import tariffs by the US, and with a retaliation due, the profitability of the world’s supply chains could be hit by rapidly rising costs.

A new study by global consultancy AlixPartners has assessed “sourcing and purchasing transformation” trends to reveal that supply chain managers may face fresh challenges in the coming months. Increasing competition means many companies are being forced to keep prices low, as digital disruption sees many long-term market competitors losing market share to new arrivals, and the paper notes that traditional business models of many industries are therefore unable to fully pass price increases on to consumers.

In the present global economic climate, which is fast becoming its most hostile since the Cold War, this could be particularly problematic. In March 2018, the United States proposed large tariffs on imported steel and aluminum. While a number of countries (largely US allies) would be exempt for at least some period of time, the measures were accompanied by additional sanctions on $150 billion of Chinese exports. In retaliation, the Chinese government has since threatened to impose 25% duties on a number of targeted US exports.

US Foreign direct investment

As of June 2018, the dispute escalated further, after the US announced that it would impose a 25% tariff on up to $50 billion of Chinese products and US President Donald Trump followed up with further threats in a statement, in which he stated he had requested the United States Trade Representative to identify $200 billion worth of Chinese goods for additional tariffs at a rate of 10%. Beijing responded by saying China will protect its interests and it is prepared to fight back. According to AlixPartners analysts, the potential trade war – a threat of an ever-escalating cycle of trade restrictions and retaliation – is selectively increasing manufacturing costs while at the same time tramping down demand.

Producer prices have already spiked in both the US and EU since the commencement of the current White House administration, having previously been in a period of dramatic decline since 2014. Partially, the decline this was thanks to an increase in productivity and lower costs as automation replaced low-skilled labour with machinery. However, it was also largely related to the ramping up of foreign investment in Mexico, China and India, in particular by the US, giving procurement professionals better access to cheaper resources for their supply chains.

Commodity prices

However, the immediate change in tone between administrations, which saw Trump and his staff put tariffs into play that would supposedly encourage manufacturers to source labour and materials solely from the States – a key part of his America First 2016 electoral narrative. In early 2017, this saw Roland Berger warn that US automotive costs would actually increase, by up to $2,000, due to higher pricing for parts. The changes were predicted to see the industry billed between $21.6 billion and $23.8 billion, while the net effect would likely be higher prices for consumers, lower margins for companies and fewer jobs in the sector – the opposite of the policy’s intent.

Now, after a period of steady decline, commodity prices are once more creeping steadily skyward, just as had been anticipated. AlixPartners’ research highlights that three major raw materials in particular have become particularly volatile, making procurement for manufacturers in a number of sectors more costly.

Aluminum, steel and soybean prices

After initially falling in early 2018, aluminum prices reached a six-year high on the London Metals Exchange in April 2018, having skyrocketed 20% following the announcement of US sanctions in March, while prices for thin-gauge-foil aluminum, which is only produced in China, have boomed three-fold. Over the same period, steel prices rose about 3%, and certain steel products’ prices have subsequently increased at double-digit rates. Similarly, following China’s retaliatory actions later in March 2018, soybean prices have increased by roughly 2%.

Clifton Wessels-Yen, a Managing Director at AlixPartners, told the press that while certain secular trends – including technological innovation and automation – may help keep a cap on pricing rises, other factors are shifting the balance of power back to the vendors, and global procurement teams must be prepared to face spiking costs as a result.

Wessels-Yen elaborated, “The emerging markets that have been viewed as relatively safe havens for market penetration will still expose some US shippers to considerable risk. As with ‘frontier markets,’” we advise our clients to develop a measured approach to doing business there. It’s best to go in careful stages to keep from being overwhelmed.”