The price of commodities.
Australia has an open market for fuel. The price of petrol at service stations can change each day; sometimes by large amounts – last week the price increased in one major city from $1.23 to $1.46 per litre.
So what has this got to do with logistics? Oil is a hard commodity, like iron ore and bauxite (for aluminium); soft commodities are course grains such as wheat and rice. Each commodity has input supply chains for equipment, fuel, seed and fertiliser. There can also be demands and capacity constraints in transport modes when international demand is high and at seasonal harvest time for agricultural commodities.
If these were the only supply chain challenges, then logisticians are able to address the various elements to gain efficiencies and cost reductions. However, as shown in the introduction example, commodity prices can increase by 19% overnight. They can also decrease, as shown with the current iron ore prices reducing from $180 to $130 per tonne in a three months and it was only $10 per tonne a few years ago. Yet demand for steel could nearly double over the next twenty years, so the price of iron ore is likely to rise. And increasing population and incomes in developing countries will lift demand for agricultural commodities, but weather can affect their supply and price; for example, the price of wheat is increasing, due to the current drought in America.
Productivity of physical resources
Volatile commodity prices increase the variable costs for customers in commodity intensive industries, such as steel. Their powerful customers resist price increases, so recent profits in steel have been reduced to negligible levels, while mining companies have experienced ‘super’ profits. This situation can force unwanted consequences, such as commodity intensive producers combining into fewer groups, or acquiring commodity producing assets to vertically integrate and gain additional value from their supply chains.
These pressures on commodity supply chains indicate that traditional approaches to understanding and improving supply chains and logistics are insufficient. The traditional emphasis on labour productivity will need to change. Logisticians, initially in primary industries and their producers, then in converters and later in fabricators, assemblers and retail (plus other sales intermederies) must address the productivity of physical resources; that is sustainability. More on this in future blogs.