In recent months, the global economy has been witnessing notable deflationary trends, particularly in the commodity sector. Major commodity prices, including oil, gas, coal, and steel, have experienced significant reductions. These declines should translate into lower costs throughout the supply chain.
However, the landscape is complicated by the ongoing effects of tariffs, trade tensions, and shifting exchange rates. These factors have both deflationary and inflationary impacts depending on the geographies and goods involved. This article explores these dynamics, the implications for corporate procurement teams, and actionable strategies to navigate this complex environment.
Global cost pressures shift as commodity prices tumble
The prices of essential commodities have been on a downward trajectory, driven by a combination of increased production, reduced demand in certain sectors, and ongoing geopolitical tensions. Several major commodities have seen notable declines:
Energy commodities: After spiking in 2022, prices for oil, liquefied natural gas (LNG), and thermal coal have dropped significantly due to production surpluses and reduced global demand in the face of economic uncertainty.
Metals: Smaller price spikes in 2022 have eased, with indices for steel, copper, lithium, and aluminum now trading below January 2022 levels.
Agricultural commodities: Earlier spikes driven by disruptions to key growing regions and supply chains have subsided, with cotton, wheat, and soybean prices all lower than in January 2022.
Chemical commodities: Prices for ethylene, ammonia, and urea have dropped steeply since early 2022, with major indices down around 50%.
These commodity price reductions are expected to lower costs for many intermediate and finished goods, offering relief to both businesses and consumers. This trend is reflected in producer price indices (PPI), particularly for the world’s major export market such as China. To be sure, China deflation is fueled by more than lower commodity prices, but they will be a factor.
As manufacturers benefit from lower input costs, they may pass savings on to customers, effectively exporting deflation and creating a more competitive marketplace.
The impact of trade barriers and exchange rates on global supply chains
While tariffs increase the price of imports, they can also have unexpected deflationary effects on goods in certain geographies. As tariffs impose additional costs on imports, companies are incentivized to seek alternative sourcing options. This shift can lead to a rerouting of goods destined for tariff-imposing markets to those with fewer or no trade barriers, exerting downward pressure on prices.
For instance, as US tariffs on Chinese goods increase, Chinese companies may look to markets with lower or no tariffs to place existing inventory and maintain production. This realignment can create a more competitive, oversupplied environment, driving down prices for specific categories of goods as suppliers vie for market share in alternative markets. This can be seen in the current dynamics for Chinese electronics and electric vehicles: a sharp reduction in goods headed to the US, alongside a sharp uptick in exports to the UK, EU, and Australia — and corresponding price decreases in those markets.
Conversely, while some goods may see price reductions due to rerouting, others may face increases as a direct result of tariffs. Goods or components that must pass through the US or other countries imposing tariffs can incur higher costs due to additional — and sometimes multiple — applications of duties. This inflationary pressure particularly affects industries that rely on imported components, such as electronics, automotive, and consumer goods. These network effects are often poorly understood, as manufacturers and customers typically have limited visibility into tier 2 and tier 3 suppliers.
A further confounding factor is the impact of exchange rates. Recent declines in the US dollar against major currencies, along with a corresponding drop in the Chinese yuan, have given buyers in Europe and countries such as Australia greater purchasing power for both American- and Chinese-produced goods. Internationally traded commodities priced in US dollars, such as oil and LNG, have also become more affordable for countries whose currencies have appreciated against the dollar.
Three ways procurement teams can stay ahead of rising tariffs and price shift
As the landscape of commodity pricing and tariffs evolves, procurement teams must adapt their strategies and develop a deep understanding of net price impacts to mitigate risks and capitalize on opportunities. Here are three actionable steps for buyers to consider:
1. Engage your suppliers in detailed price discussions
Work closely with suppliers to understand how lower input costs and exchange rates are affecting product pricing. As commodity prices decline, there is a strong case for negotiating adjustments to existing contracts. Buyers should leverage market data and supplier relationships to push for price reductions that more accurately reflect current commodity and tariff-driven conditions.
2. Understand supply chain movements in detail
Conduct a thorough analysis of the physical flow of goods within the supply chain. Identify where and how tariffs are impacting costs at each stage. This visibility increases the transparency along the supply chain, helps procurement teams make more informed and actionable sourcing decisions, and uncovers more opportunities to mitigate risks and capture value.
3. Work with suppliers to appropriately manage risk
Review contracts to identify rise-and-fall clauses and ensure they are tied to appropriately proportioned pricing drivers, based on detailed analysis of the actual impact driven by actual input cost movements. Codify these drivers clearly in contracts. Importantly, this is not about shifting uncontrollable risk onto suppliers — it’s about ensuring buyers and suppliers work together with fair and reasonable price adjustment mechanisms, and the party that can best manage the risk also owns the risk.
Procurement’s role in managing pricing uncertainty and trade risks
The interplay between falling commodity prices, exchange rates, and the impact of tariffs presents both challenges and opportunities for businesses — it’s clearly not a one-way trend. As commodity prices decline, companies stand to benefit from lower costs; however, the complexities introduced by tariffs and rates can create uneven pricing pressures across different goods. By proactively engaging with suppliers, closely analyzing supply chain dynamics, and reviewing contract terms, category management teams can navigate this shifting landscape more effectively. In doing so, they can position their organizations to take advantage of deflationary trends, build stronger supplier relationships, and fairly share the risks and opportunities tied to tariffs and trade tensions.