The demand environment is improving and supportive of commodity prices. After declining in the first quarter, U.S. gross domestic product (GDP) rebounded at a 4.6 percent annual rate in the second quarter of 2014. Real GDP is now projected to increase 2.2 percent in 2014 and 2.7 percent in 2015, supported by balanced gains in household and business spending, according to IHS Director Laura Hodges. With federal bond purchases ending in October 2014, however, a potential headwind to material price escalation is predicted. As for interest rates, Hodges says that formal increases won’t come until mid-2015 at the earliest.
Other forces impacting the world economy right now include China’s housing market, which continues to deteriorate—with falling prices weighing on residential construction starts. Although targeted stimulus may help near-term growth prospects, Hodges says, long-term structural risks are yet to be addressed. “That’s something to watch closely as you establish buying plans for 2015.”
Based upon insight from the IHS Pricing & Purchasing Service, this report provides vital market, price, and cost information for critical commodities in order to help organizations make informed sourcing and procurement decisions through 2015 and beyond.
The Carbon and Stainless Steel Outlook
Throughout 2014, IHS continued to track a significant oversupply in the carbon steel market. Combined with the threat of imports, this oversupply continues to suppress prices. North America is faring best through this period, according to IHS Senior Manager Jason Kaplan, although some prices saw increases through the year, low utilization is keeping mill profitability low. “In 2015, we’ll see capacity forcibly removed from world supply and a subsequent price spike,” says Kaplan, who predicts a buyers’ market for carbon steel through the end of 2014 followed by a slip into a sellers’ market in 2015.“
Mills cannot keep losing money forever,” says Kaplan. “In 2015, capacity will be forced out of the market and prices will spike up as supply fears increase.” For buyers, that could mean a shift to a sellers’ market during the coming year. “Delivery will be more of a worry than price.” To offset these trends, Kaplan advises buyers to qualify at least two sources before procuring carbon steel and to also try to lock in contracts. For 2015, spot buyers should budget prices that are 10 percent higher in North America, and 15 to 25 percent higher in Europe and Asia. “Even if your supply is secure,” he concludes, “beware that others will need to source material.”
In assessing crude steel production economics, Kaplan says that mills need at least 80 percent utilization to be profitable, although some can sustain lower utilization and maintain profitability. He predicts a benign pricing structure through the remainder of 2014, but says that supply shock could drive prices up during the first quarter. “We see additional capacity coming online after the supply shock,” says Kaplan, “with the price spike dissipating by 2016.”
The stainless steel market remains better balanced, but is still historically cheap, according to Kaplan. He points out that stainless steel prices are rising steadily due to demand and reduced supply. Nickel (and molybdenum) stabilized and will trade in narrow ban, he adds. Although a risk, Russian sanctions and the Indonesian export ban are unlikely to affect nickel supply or price during the coming year.
“Stainless is more consolidated than the carbon steel market. Supply and demand may not yet be fully in balance, but they are a lot closer than the carbon steel market,” Kaplan adds, “and increasing demand is making mill profitability sustainable within the stainless steel market.” He advises buyers to lock in prices now, rather than buying on the spot. “Prices will rise steadily over the next two years on base prices, but will end 2016 still well below 2008’s levels.”
Several factors will influence chemical markets in 2015, including energy prices (crude and natural gas), supply issues (new capacity/operational sustainability) and demand growth. IHS Senior Director Howard Rappaport says that these forces can take precedence in the market, and either drive prices up or down. “There’s new capacity coming online in several regions, and also the issue of operational sustainability and stability,” he notes. “We had some unexpected outages and extended maintenance downtime recently, for example, that influenced supply.”
Natural gas is a major driver in North America and the Middle East, while other regions rely on crude oil. Waves of new capacity are coming in the U.S. (based on ethane and propane), however, it will be at least two to three more years before we see a major impact, says Rappaport. Europe will continue to consolidate capacity, while the U.S., Asia and the Middle East continue building.
“Chemical industry margins are robust in the U.S. and are expected to erode slowly over the next 18 to 24 months,” says Rappaport, adding that supply issues and price volatility associated with propylene and butadiene will work themselves out with new “on-purpose” plants.
“The U.S. will have to become more of an exporter as new capacity comes on,” says Rappaport. Buyers can expect at least another two to three years before the wave of new capacity has a significant impact on the situation with both supply-demand and pricing in the U.S. “Markets are still balanced to tight and the wave of new capacity coming will have an influence on market conditions,” Rappaport says, “but not right away.”
The U.S. ethylene market will remain balanced to tight over the next year, with effective operating rates at or above 95 percent. The U.S. and the Middle East will continue to export ethylene and derivatives due to cost advantages. Concurrently, regional ethylene prices will be relatively flat, with the U.S. average price (mixed contract and spot) trending slightly lower, says Rappaport.
Chemical industry prices are trending near record highs for many products, according to Rappaport, who expects producer margins to erode slowly over the next 18 months. “We don’t think prices are going to be dropping all that rapidly,” he says. A changing profile of propylene sources in the U.S. will result in an emergence of additional capacity, says Rappaport, with more coming from propane de-hydro (PDH) and less coming from ethylene crackers.
As industry feed-slates trend lighter, propylene production from both steam crackers and refineries will not be able to keep pace with demand growth. Thus, on-purpose production remains the main avenue to support that growth. Rappaport says that PDH in the U.S., Middle East and Asia, along with coal to olefins in China, are winning the on-purpose race. “The PDH units in China being added will be based on propane imports that compete with the fuels market,” he notes. “China coal to olefins will face water and environmental issues, and are very high capital cost.”
For 2015, Rappaport predicts a smoother price profile with slight downward potential “if we see any softening in energy prices.” He sees no need for buyers to build inventories if the chemical and refining industry complex is running smoothly, and expects producers to attempt to pass along any cost increases, no matter how small. “New capacity will not be here in time to have a major impact on 2015 prices,” says Rappaport.
“We are definitely coming down from peak pricing and some modest relief is in sight (some of it will be in the form of reduced volatility),” says Rappaport, “with increases in Chinese consumption as one factor that could temporarily soak up some of the available spot material and create a temporary tightening of supply.”
Global Labor Markets
On a global level, the strength of the labor markets is reduced or at least stabilized in many countries. Wage growth was scaled back for many countries, says Hodges, and growth in emerging markets was hit hard. “One of the stronger markets—the United States—will see improvements next year,” says Hodges, “but even there, wages will only lift from 2 percent this year to closer to 2.5 percent over the next two years.”
That said, Hodges sees pockets of growth pressuring wages higher for some occupations and sectors. “Expect to pay more in these pockets of growth, in the U.S. and even globally,” she says.
Pointing to Manpower’s most recent Talent Shortage Survey as an example, Hodges says current shortages have yet to reach pre-recession levels in terms of the percentage of firms reporting difficulties filling jobs. Overall, just under 40 percent of employers are having difficulty filling jobs. In the Americas and Asia-Pacific (APAC) regions, that number increases to 50 percent. Positions that are hardest to fill include skilled trades, engineers, technicians, sales representatives and accounting/finance staff.
With labor market conditions improving in the U.S. and with the domestic economy adding 1.6 million jobs during the first eight months of 2014 (compared to 1.4 million jobs during the same period in 2013), Hodges says conditions could turn the corner in the U.S. in 2015. And while the largest share of jobs created are in low-paying industries (trade, transportation, administration, leisure and hospitality), she says the market is tightening for U.S. college graduates. “That’s something to be concerned with going forward,” says Hodges, “knowing that you may potentially be paying more for these types of workers.”
Geography also plays a role in the U.S. labor market, particularly in states like Texas with an unemployment rate close to 5 percent. “Texas is a real star of the U.S. economy; that’s where the action is,” says Hodges, “and where you can expect to pay a higher above-average rate for your workers.”
In 2015, Hodges says finding qualified and skilled workers will be a challenge. Labor markets are improving in the developed world, including the U.S., Japan, the UK and Germany, but this is from a relatively low growth rate. “Workers in India and China will continue to receive strong wage gains due to strong demand and inflation,” says Hodges, who concludes with, “Pockets of growth (particularly skilled workers) should be your concern during the coming year.”
World corn production is forecast to expand over 2013, according to Brandon Kliethermes, IHS Senior Economist, who says that after three years of low stocks, production gains and corn carry-over from 2013/14, the 2014/15 stocks will grow significantly. “Corn stocks are forecast to remain high as production continues to outpace consumption,” he says.
The surge in corn prices over the last three years led to a significant increase in world corn area, says Kliethermes, who predicts a decline in world corn area over the next two years. “In 2015/16, area harvested is expected to be mostly flat with the previous year, but risk remains for further retracement given the drop in global prices,” he adds.
World corn prices continue to soften following a large global corn crop. For the rest of the calendar year, Kliethermes says corn prices should slide lower, though at a slower rate than June, through harvest. Finally, he says that, for the 2014/15 season, an expansion in corn for ethanol use will keep corn prices from settling well below $3.5 per bushel.
World wheat production is expected to be up in 2015/16, although for the short term, world wheat production will grow at a slower pace. “World wheat production will keep up with demand, allowing stocks to grow year over year,” says Kliethermes.
Global wheat prices continue to be pressured lower with a large global supply estimate for 2014/15. And, as milling quality wheat was downgraded in some countries, a premium for milling quality wheat is expected. At the same time, U.S. durum prices also witnessed major price support following a lower expected production, a slow crop development/harvest and higher shipping cost. “In general,” Kliethermes predicts, “longer term wheat prices should ease further through the first half of 2015.”
Global cotton production continues to outpace growth in demand, leading to an increased level of stocks in 2014/15. Concerns of the Indian monsoon worsening lessened, says Kliethermes, planting progressed well and areas increased. “Declining global area during the next couple seasons follow lower prices,” he adds, “however, competing crops also have lower prices, weakening the magnitude of decline.”
It was a record year for the U.S. livestock industry, thanks in part to improving consumer demand for meat products. “Looking at the index numbers, we can see improvements in consumers’ willingness to pay more for meat products,” says IHS Principal Economist Ryland Maltsbarger. “That’s good news for the meat and livestock industry in general, including beef, pork and chicken.”
In reviewing 2014 U.S. inventory and cattle slaughter levels, Maltsbarger says that herd expansion is on the rise mainly in response to calf prices. In 2014, beef cow inventories began the year about 5 percent below the five-year average, he says, and “there appears to be some rebuilding going on with both heifer and beef cows.”
In terms of cattle supply, Maltsbarger says that calf crops will reach a bottom in 2014. “We’re optimistic about this and also about the breeding activity, which should show up in a significant gain in calf crop in 2015,” he notes, adding that pricing could fluctuate based on activity in the sector in the coming year. “I’m somewhat doubtful that we’ll see beef prices rally to the level that we saw in 2014.”
Hogs and Chickens
Starting in late 2013, the spread of porcine epidemic diarrhea virus (PEDv) significantly reduced hog production, according to Maltsbarger. “That reduction led to a ramp-up in prices through the first three quarters of 2014,” he says, noting that lower-than-expected breeding activity also helped to drive those prices up. And while sow farrowing was up modestly in July and August in anticipation of the coming year, tight hog suppliers will likely be prevalent. “We kept up a stronger pace of hog slaughter, which will lead to lower pork prices through the end of 2014 and into 2015,” says Maltsbarger.
The broiler market continues to post strong net returns, according to Maltsbarger, who says 2014 production is weak in the sector despite a strong net returns outlook. “The year ahead appears likely to be stronger,” he says. “We saw the industry begin to hold steady during the third quarter—a time when you’d usually see seasonal declines.”
As evidenced by this report, commodity prices will remain volatile into 2015 and beyond. By actively monitoring weekly—or even daily—price movements, trends and other forces, buyers can position their companies for success in markets that aren’t always easy to predict.