Commodity Deflation is Closing the Growth Gap
POP!
That’s the sound of the commodity price bubble popping. The implications for wholesaler-distributor’s revenue and profit growth will be significant in 2009.
If you have Facing the Forces of Change®: Lead the Way in the Supply Chain, now is the time to reread the section in Chapter Five on the risks of a slowdown in commodity prices.
I have been pointing out the distorting effect of the rapid rise in commodity prices for some time. In October 2006, Lawson Software published my initial research into the “growth gap” – the difference between actual revenue growth and inflation-adjusted revenue growth. (You can still download the paper Closing the Growth Gap in Wholesale Distribution from Lawson’s web site.) The 2008 Industry Growth Update shows the growth gap in the 19 major wholesale distribution sectors.
Oil prices closed below $64 per barrel yesterday, a 17 month low. This drop will be good news for most wholesaler-distributors given the direct impact on transportation costs. However, distributors of oil-based products – such as plastics, chemical, or industrial lubricants – will find their revenues deflating quickly.
- Copper closed at $1.675 per pound, a far cry from the nearly $4 per pound prices earlier this year. As I note in the 2008 Wholesale Distribution Economic Report on Hardware, Plumbing, and Heating Equipment and Supplies Wholesale Distributors, wholesalers of plumbing and HVAC/R products have seen their top-line revenues grow as upstream commodity prices flowed down the channel. The process of deflation for this sector will be especially painful.
Keep in mind that the dollar’s recent strength is also affecting commodity prices because most major commodities are denominated in dollars. As the dollar gets stronger versus other currencies, the local currency price of dollar-denominated commodities increases for foreign buyers. Demand for these commodities will further hurt demand and push down prices.
Tune in for my 2009 Economic Forecast for Wholesale Distribution live webcast on November 13. I'll explain the outlook for commodity and currency prices and discuss how wholesaler-distributors and their suppliers can get ready for a deflationary environment. Please feel free to email me any specific questions that you would like me to address during the webcast.
P.S. David Gordon and Allen Ray at Electrical Trends have some comments for electrical distributors here: The Impact of the Cliff-Diving Prices of Commodities.
2 comments:
Adam,
Thanks for the posting at www.electricaltrends.com
Just a quick comment:
For those distributors who played the copper market "close to the vest" GOOD for them.
Watch out for "steel".
Allen Ray Associates
This is the beginning of some major changes in market structure. It is too late now to get an out of control business squared away and under control. The tide is moving out way too fast. Those firms that are already squared away are going to be able to pick up some major share from the turmoil and confusion. This collapse will affect larges as strongly as smalls. The share winners will be the well managed. This is a good decade to be a consultant.
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