Raw Pricing

Logistics managers worldwide are growing more concerned by the day about pricing, but it’s not the pricing you think.

While rates across the full range of transportation businesses have been on a too-familiar roller-coaster ride this year, there are deeper worries in the core pricing that hits companies where they truly live. The prices of raw industrial commodities have been climbing this year, extending a run that began last year for materials ranging from cotton to industrial resins and metals, and reaching the point where some companies fear rising production costs may undercut their businesses.

Some of those prices have started to decline, but they’re falling from record highs, and the impact of the still-high prices is pushing through the supply chain.

Raw cotton prices, for instance, fell last week, but the record high of $2.19 per pound left enormous bales in textile factories and manufacturers trying to keep up with the higher cost basis. A survey of textile companies by Capital Business Credit said consumers could expect to pay 10 to 15 percent more this year for cotton products.

A construction industry survey released last week showed the prices of construction materials grew 1.4 percent in April after rising 2 percent in March. The inflation is slowing, in other words, but the prices remain high, and headed higher.

The National Association of Business Economics said last week its survey of economists showed them reducing their forecast for U.S. economic growth from an earlier estimate of 3.3 percent to 2.8 percent because of higher commodity prices and inflation.

For supply chain managers and their transportation providers, it’s an issue that may loom larger than anything going on with freight rates.

As a logistics chief for one large importer put it, the prices go to the heart of his business. “You have lines of credit with banks, you finance the goods and have a general financial structure in which you manage your business,” said this shipper, who spoke on condition of anonymity because he isn’t authorized to speak for his company. “If you drive the prices of the products that are in the mix of your product up high enough, that changes your business model.”

Carriers understand that. The rising cost of fuel has triggered some structural changes in the transportation world, pushing ocean carriers to slow-steam their way to lower operating costs (while raising inventory carrying costs for the companies whose goods are sitting on the water) and shifting the competitive lines between U.S. truckload, less-than-truckload and railroad operators.

The good news for them, and their customers, is fuel costs appear to be heading south after oil prices eased on world markets in recent weeks.

And data in the commodities world suggests pricing is stepping back from a precipice. The JOC-ECRI Industrial Price Index produced by The Journal of Commerce and the Economic Cycle Research Institute slipped 4.6 points last week from the week before to its lowest point since Jan. 21.

That may be a sign the surge in commodity price inflation has run its course. But because rising commodity prices also suggest confidence in future demand, no one wants that index to fall back too far. That, of course, would create a business model no one wants to see return.

Paul Page is executive director of The Journal of Commerce. He can be contacted at 202-355-1170, or at ppage@joc.com. Follow Paul Page on Twitter, www.twitter.com/paulpage.
  

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