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Published Q4 2008
Executive Observations
The overwhelming story during the third quarter was the consistent drop in metal raw material prices since mid-July. Global steel prices fell an average 27 percent, while non-ferrous prices fell to levels not seen since the start of 2005. The lower prices are a result of decreased global demand for metal products, as companies react to the current economic crisis in the U.S. and around the globe. Despite the turbulent metal markets, metals sourcing activities at Ariba reached the highest levels since the fall of 2006, as buyers attempted to meet their annual sourcing objectives before the close of 2008. Some of the most influential trends during the past quarter included:
- Steel prices plummeted during the quarter, with prices dropping more than 36 percent in China and Central and Eastern Europe, 21.5 percent in Western Europe, and 12.2 percent in the U.S. This is in stark contrast to the sharp spike that steel achieved during the second quarter, when prices increased more than 31 percent.
- Non-ferrous prices also dropped during the last three months, with significantly lower prices for aluminum, copper, nickel, lead, zinc, and others. Nickel and copper led the way with decreases starting in July and ending in October at 45 percent and 43 percent lower, respectively. Aluminum and zinc prices also fell substantially during the quarter, with early October prices that are both 30 percent lower than the start of July.
- Ferrous scrap prices fell from $865 per ton in early July to $220 per ton by the middle of October. This sharp decline came on the heels of a historic spike upward of more than 113 percent during the previous quarter. The extreme volatility in scrap is causing all steel product suppliers to remain skeptical about future pricing, and therefore attempt to compensate for the volatility by adding costs to all quotations.
- China continues to see strong growth in their GDP, although not at the same levels that occurred in 2007. GDP growth in China was 10.1 percent in the second quarter of 2008, compared to the annual GDP growth of 11.7 percent in 2007. The perceived slowdown in Chinese production and consumption of metal products is misleading—the Chinese economy is still growing at very high levels, albeit at a slightly slower pace.
Third Quarter Trends
The average savings identified in metals projects concluded by Ariba in the third quarter was 11.6 percent, which marks the lowest average savings figure since the fourth quarter of 2006. The drop of approximately three percent in savings compared to the previous quarter is due to the suppliers’ response to extreme volatility in raw metal pricing during the quarter. While raw metal prices did fall during the quarter, many suppliers viewed the early declines with skepticism due to the sharp spikes that occurred in previous quarters. Project savings should rebound in the fourth quarter as raw material costs continue to drop. Machinings, stampings, and sheet metal fabrication projects delivered the highest average savings, while castings and fasteners projects also provided considerable sourcing opportunities.
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