ERA Group’s quarterly insights regarding market conditions, potential impacts on procurement, and supply chain planning.
General supply chain observations & updates
Supply chain & freight
Cost cutting while adding resilience
Companies are closely watching their cost and profit margins, thanks to the pandemic swings from low supply and high demand to warehouses bursting with products that no one can buy. Climate and geopolitical concerns add even more factors to consider. Executives are walking the line between cutting costs wherever possible while still focusing more on their supply chain than ever before.
Philipp Oemler, a managing director with FTI Consulting, told Supply Chain Dive, “From my point of view, there is a mind shift…people came to the conclusion that the supply chain is one of their strategic forces and that they need to secure it. The pendulum is going more to the direction of cost, but there is still a mindset of resilience…[Firms are] investing more in the diversification of their supplier base and long-term agreements.” 1
Ocean freight woes
Red Sea risks are still causing many shippers to divert cargo, increasing transit time. Congested Asian ports are reporting up to a week in delays. Labor negotiations and strike concerns at the East Coast and Gulf Coast ports have cargo orders moving back to the West Coast.2
All of these factors are leading to higher ocean shipping rates and delays during the second half of 2024. “What many hoped would be an easy and shipper-controlled year has sharply turned once again to a year of uncertainty and disruption,” said Stephanie Loomis, head of ocean freight of the Americas for Rhenus Logistics, in a recent Supply Chain Dive article. 3
Chart Data Source: Freightos
Truck tonnage mixed results
“The trucking industry experienced its first increase in tonnage in May this year, American Trucking Associations (ATA) reported June 18.”4 Experts are cautiously optimistic, though, questioning the discrepancy between tonnage increasing in the ATA Index and shipments decreasing in the Cass Freight Index.
“I don’t know if what we’re seeing is that freight is heavier and more dense, more consolidated, or if there’s going to be some corrections to one report or the other,” said Jonathan Phares, assistant professor of supply chain management at Iowa State University in a Transport Topics article.5
KEY TAKEAWAYS: Currently, balancing cost with supply redundancy is a key consideration for most manufacturers. Uncertainty in America’s political process increases supply chain uncertainty and stress for buyers. We forecast that freight tonnage will continue to increase steadily, and shipping may also be impacted by more storms this year as a heavier-than-normal hurricane season is being forecasted. With all of this in mind, our overall suggestions are to ensure continuity of supply and shipping by continuing to foster relationships and communication with your suppliers and freight carriers.
Corrugated
Chart Data: Pulp and Paper Weekly RISI Index
Michael Roxland, senior paper and packing analyst at Truist Securities, recently told Packaging Dive, “Overall, producers have now successfully implemented $80/ton ($40/ton in February, $40/ton in June) of the original $50-90/ton linerboard increase announced late last year.”6
Most producers are making this latest RISI increase effective the first of August, although uncoated recycled paperboard increases began in July. Also of note, Smurfit Kappa has officially acquired WestRock, resulting in “Smurfit WestRock” as now one of the world’s largest packaging companies. This is amid rumors of other transactions encompassing International Paper, DS Smith, Berry Global, Sonoco, Hood Container, and more.7
KEY TAKEAWAY: Based on another market increase, this quarter’s key takeaway is exactly the same as last quarter. While the recent corrugated increase is certainly real, we have seen some suppliers try to take advantage of the situation by passing along higher percentages than the market justifies. If you are receiving an increase, be sure to ask that supplier if they passed along all the prior decreases from late 2022 through late 2023. If not, then they have had padded margins since at least early summer 2023 and should not be taking advantage of you now. As always, if you do not have a formal agreement in place with your corrugated supplier that explicitly governs how price changes are managed, the time is now to negotiate such an agreement.
Lumber/Pallets
Lumber prices have been extremely dynamic since 2020, with supply and demand as the main culprit of the volatility. However, prices have taken a nosedive and appear to be set to stay there for a while. The CEO of Deacon Lumber, Stinson Dean, told Business Insider, “While those in the lumber industry may not be having a fantastic time, if you’re in the market for lumber, it’s a good time to buy…If you’ve been putting off a remodel for three years, a deck, a fence, right now — and you need to be watching prices — this summer will be the best time to secure materials for that in four-plus years.”8
Consequently, following the lumber trend, wooden pallet prices are also lower than we’ve seen since May 2021. Pallet supply is high, driving pallet prices low despite increased labor costs for pallet producers.9
KEY TAKEAWAY: Put pressure on your lumber/pallet suppliers for price decreases. It’s also a great time to consider conducting tenders for your pallet needs (prior to the Q4 retail season when pallet prices typically increase). The same holds true for lumber (with respect to pushing for decreases or conducting tenders).
Chemicals & Gases
Major chemical producers are being forced to make “strategic shifts” to keep up with the chemical price fluctuations during the first half of 2024. “Benzene prices spiked substantially, while propylene, acetone, and phenol prices were relatively stable.”10 Chemical producers saw an increase in new orders (including export orders) and reported an increase in production, but prices paid for raw materials also crept upwards.11
Increases in crude oil prices led to increased gasoline prices, with a national average of $3.54/gallon at the beginning of July. 12 And, like everything else, chemical pricing is influenced by the current rising ocean freight prices.
Chart Data: AmericanChemistry.com
KEY TAKEAWAY: After hitting a low in January 2024, it appears that we’re moving toward an environment of increasing prices. If you have not previously worked with your suppliers to ensure they are treating you fairly, as well as using indices for price movements, now is the time to do so.
Plastics
As reported by PlasticsToday.com, “PlasticsExchange said it retains a bullish outlook on both PP (polypropylene) and PE (polyethylene) resin, expecting further price hikes in July: Spot supplies are limited, export demand shows no signs of flagging, and weather-related disruptions may well be on the horizon.”13,14 Producers pushed for a three-cent PE increase in June, with talk of another increase for July, pointing mostly to rising ocean freight prices. Also worth noting, BASF, Formosa Plastics, Bayport Polymers LLC, and Dow Chemicals all faced plant shutdowns throughout the beginning of July.15
KEY TAKEAWAY: The anticipated downward price movement we were expecting never materialized. Similar to chemicals overall, if you have not worked with your suppliers to ensure their margins are in line and your prices are adjusted based on recognized industry indices, now is the time to do so.
Metals
Tariffs from the White House, tariffs from Mexico, and bans on Russian metal are all affecting metal prices and lead times. “There is growing resentment about Chinese steel coming into the U.S. through third-party countries (particularly Mexico).” Base metals were lower across the board in the middle of July.16 Copper has experienced a drop in price after “hopes of a shortage cooled.”17 In spite of this, one major supplier has reported that copper and brass are on allocation and will be for the foreseeable future. CNBC and others have reported that “Existing mines and projects under construction will meet only 80% of copper needs by 2030, according to the International Energy Agency.”18 U.S. hot-rolled coil steel prices are low due to the current overcapacity in the market, and mills are expected to reduce production and increase prices in response.19
KEY TAKEAWAY: There is quite a bit of uncertainty in the current metals markets. This may be your last chance for some time to stock up on steel at low prices, although the market for copper and brass is constrained. If you are a regular purchaser of copper and brass, it makes sense to work with your supplier(s) to try to be at the front of the line for available supply.
About the Authors
Travis Cantrell and Patrick Garr are Manufacturing Specialists at ERA Group. They both hold engineering degrees and have over 29 years of collective experience studying complicated client expenditures in direct material, industrial chemicals/gases, packaging supplies, and factory consumables/MRO. ERA utilizes its in-depth subject-matter expertise to negotiate with suppliers and deliver best-in-class sourcing solutions for their clients.
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Sources:
1) “Shortages 2024: What supplies are still at risk,” supplychaindive.com; 2) “Biggest U.S. ports union suspends labor talks,” CNBC.com; 3) “Ocean rates skyrocket, reflecting cautionary market,” supplychaindive.com; 4, 5) “ATA Reports Tonnage Turnaround for May with 1.5% Rise,” ttnews.com; 6) “Second round of fiber product price increases,” PackagingDive.com; 7) 2024’s biggest packaging acquisition news, PackagingDive.com; 8) “The End of Lumber Mania,”Businessinsider.com; 9) “Pallet Price Trends for 2024,” FALM.com 10)“Chemical price fluctuations force strategic shifts, say analysts,” by Market TODAY; 11) “Weekly Chemistry and Economic Trends (July 5, 2024),” AmericanChemistry.com; 12) ProcuremenetIQ.com; 13) “Resin Price Report: Buyers Step Up,” PlasticsToday.com; 14) ThePlasticsExchage.com, July 5, 2024; 15) CHEMANALYST.com; 16)Ferguson Weekly Newsletter—Week of July 15 2024; 17) Copper Fever Breaks As Metal Loses Luster, WSJ 6/26/2024; 18) CNBC 5/31/2024; 19) Ferguson Weekly Newsletter—Week of July 15 2024