Purchasers Benefit From Low Commodity Prices, but High Supply Chain Risks to Dominate 2016

Producers’ profits undermined; 2016 global commodities outlook
discussed at IHS New Year’s event in Frankfurt

FRANKFURT, Germany–(BUSINESS WIRE)–Low profitability has undermined commodity producers and brings high
risks to the supply chain, according to new analysis released today by
IHS Inc. (NYSE:IHS), the leading global source of critical information
and insight, at the company’s New Year’s conference.

Overall, the IHS Materials Price Index, a weighted average of the 10
most common commodities, fell 40 percent over 2015, bringing it below
the lows of the economic crisis.

“The risk to the supply base for long-term commodities is rising
rapidly,” said Jason Kaplan, senior research manager at the IHS
Pricing & Purchasing Service. “Low prices have clearly undercut
the margins of commodity producers, with many operating at losses.”

“Weak demand and overcapacity have deflated prices in many industries
and supply has failed to react quickly to the drop off in price.

“If we look at the nickel industry, 70 percent of producers are losing
money, but no one wants to blink first,” Kaplan said. “We are witnessing
a replay of the year 2000 with the US steel market. The same situation
led to 21 companies going out of business over 18 months.”

“Producers are reacting to this current climate by slashing both capital
expenditure and cutting operating expenditure, with inevitable job
cuts,” Kaplan said. “How the supply base fully adjusts to the low
pricing is still unclear, but the implications for long-term, stable
commodity supply are looking increasingly negative.”

Base metals

Base metals have been depressed by both weak fundamentals and lack of
financial interest. While demand for many commodities has weakened, high
capital investments means mines have kept running. “Most base metal
prices will stay low, as long as no structural change cuts supply,”
Kaplan said.

Polymers

Low oil costs fed through into commodity-grade polymer prices bring down
prices. “High input costs have curtailed domestic supply making Europe,
but global capacity has lifted imports into the region and undermined
prices,” Kaplan said.

Labor

Between 2014 and 2015, German wages escalated at a fast rate. “Labor
costs will trend upwards broadly in-line with the rate of inflation, but
legislation and currency effects will also play a part in some regions,”
Kaplan said. “Specifically in German, we anticipate stronger growth in
2016 on the new minimum wage laws and a tight labor market.”

About IHS (www.ihs.com)

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committed to sustainable, profitable growth and employs approximately
8,600 people in 32 countries around the world.

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