Sinister Supply Chains July 2014
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Commodities such as oil, minerals, and materials are a major part of the global economy and feature in many complex supply chains. All developed economies rely on international trade to supply some or all of their basic industrial resources. Companies increasingly have to cope with supplies' being stockpiled outside generally accessible markets, suppliers' turning off the supply of oil, and counterfeit materials' finding their way into a hitherto secure supply chain. Welcome to a world of shadow warehouses, counterfeit commodities, and stranded assets.
Welcome to a world of shadow warehouses, counterfeit commodities, and stranded assets.
The past decade has seen major financial interest and investment in commodities, including many metals. The prices of certain metals—such as aluminum, gold, and copper—have experienced significant increases. Recent data suggest that some investors are stockpiling industrial materials in private warehouses. Traditionally, trading of metals takes place through exchanges. The London Metal Exchange (LME; London, England), which was acquired by Hong Kong Exchanges and Clearing (Hong Kong, China) in 2012, acts as the world center for trading industrial metals and maintains a system of warehouses for storing metals. Recently, some investors—including banks, commodity merchants, and hedge funds—started buying metals without going through the LME and are storing those metals using a private warehouse system. Reportedly, these shadow warehouses now store tens of millions of tons of aluminum, copper, nickel, and zinc. According to some calculations, as of October 2013, investors had stashed 7 million to 10 million tons of aluminum in these warehouses. In comparison, LME-licensed warehouses contained only 5.5 million tons of aluminum. This surprising market structure enables investors to hide resources that are crucial for manufacturing. Because large volumes of metals are hidden, establishing prices for these commodities will become increasingly problematic. "As a result, producers and consumers are bracing for potentially wild swings in metals prices as market participants have difficulty accurately gauging supplies of these metals" ("Heavy Metal Lurks in the Shadows," Wall Street Journal, 27 December 2013; online).
China has become the world's largest consumer of many important metals—including steel, aluminum, and copper—and its high consumption has contributed to rises in the cost of those metals. The amount of copper the nation imports has recently grown tremendously. Surprisingly, these resources are making their way into warehouses instead of seeing use in manufacturing processes. "Copper has become an increasingly popular source of collateral for Chinese traders who can obtain US dollar loans and profit from interest rate arbitrage" ("Copper futures fall by daily limit," Financial Times, 12 March 2014; online). However, following China's first corporate bond default on 7 March 2014, the price of copper fell. Indeed, copper prices dipped below $6500 per tonne—a near four-year low. If a large-scale sell-off of copper occurs, copper prices could drop even further. Such a drop in copper prices would have a tremendous effect on supply chains and, because of copper's function as collateral, financial markets.
Just as investors could prevent processors from accessing metals, governments could limit market segments' long-time access to fossil-based energy. Climate-change considerations are already affecting government policies around the world, and the future availability of resources such as oil is uncertain. According to HSBC Global Research (HSBC; London, England), governments and state-owned companies control 90% of the world's fossil-fuel reserves. HSBC is concerned that governments could place limits on access to fossil-based energy resources for environmental reasons, leading to a loss in oil companies' market values. The concern arose because of a 2010 International Energy Agency (Paris, France) report's claim that one-third of global fossil-fuel reserves must remain untouched until 2050 to prevent a climate-change catastrophe. In March 2014, a group of Members of Parliament in the United Kingdom warned that the world's financial markets could be creating a bubble because they are currently overvaluing some large companies' fossil-fuel-related assets. The group's report warns that a financial catastrophe could occur if shares in companies active in oil, coal, and gas sectors turn out to be overvalued. And a report by the Green European Foundation, a political foundation at European level, warns that these stranded assets could prove particularly destructive to private pensions in the United Kingdom.
Industrial materials such as plastics often form part of complex supply chains. For many manufacturers, materials quality control is of utmost importance. High-end carmaker Aston Martin (Gaydon, England) recently instigated a recall of more than 17 000 vehicles to correct a faulty accelerator-pedal arm. Aston Martin designed this component using a specific grade of DuPont (Wilmington, Delaware) plastic and purchased the pedal assemblies from a UK-based supplier. That supplier purchased components from a Hong Kong–based company, which contracted the molding of the pedal-arm section to Shenzhen Kexiang Mould Tool Co. (SKMT; Shenzhen, China). SKMT purchased the plastic for the pedal arm from its supplier, Synthetic Plastic Raw Material Co. (Dongguan, China), and the plastic that SKMT used to mold the arm turned out to be not the DuPont plastic Aston Martin specified but a counterfeit material. Because the counterfeit plastic's physical properties were inferior to those of the authentic DuPont plastic, the resulting accelerator pedal could suffer premature failure. This recall illustrates how outsourcing can result in problems buried within complex global supply chains.
Complex supply-chain issues, disruptive investment models, and climate-change-driven government policies are changing the landscape for materials and resources. Developments can ripple through many industries. For companies, monitoring developments that could affect the supply of materials and resources and developing strategies to deal with any resulting issues will become increasingly important aspects of logistics and supply-chain management.