GEP Spend Category Outlook 2022 GEP Spend Category Outlook 2022

Supply chains continue to feel the pressure from a host of risks and uncertainties, such as labor shortages, climate change, geopolitical risks, cyber threats and rising inflation. 2022 offers challenges, but also opportunities to control costs and gain certainty amid the chaos.

What can enterprises do to mitigate risks, ensure supply continuity and keep costs under check?

The GEP Spend Category Outlook 2022 examines the megatrends that will shape sourcing and supply chain strategies this year. This report provides deep insights across a wide range of direct and indirect spend categories, enabling procurement and supply chain professionals to plan ahead and determine their sourcing and purchasing strategy.

Executive Summary

The year 2021 was uncertain for many organizations, with the pandemic continuing to rage across many regions. This disrupted the supply chains, with demand for some goods and services going through the roof while stagnating for others.

In 2022, organizations are still looking to navigate the volatilities in demand and supply. Their challenges are not just limited to the supply chain but other aspects of business too, such as labor.

For instance, even though the employment recovery rate accelerated in the second half of 2021, the unemployment rate for 2022 is projected to be 5.7% — still higher than the pre-COVID-19 numbers.1

However, businesses focusing on innovation, resilient supply chains, adoption of digital technologies and sustainability have not only better withstood the challenges but also increased their revenue and market share.

In this 2022 edition of GEP Spend Category Outlook, our global subject matter experts discuss the key trends and risks impacting various categories and the strategies that have helped our clients keep up with the ever-changing business needs. This report will help procurement leaders to category managers create short-term and long-term category plans and be better prepared for the uncertainties ahead this year.

The report is classified into:

  • Influencing factors: Key risks that have had the most impact on different categories that procurement experts should evaluate for 2022.
  • Resulting buyer action: Key areas for procurement experts to minimize risk and propel the business towards a path of stability and growth.
  • Category deep dives: Global insights across key direct and indirect spend categories.

Key Risks Impacting Supply Chains

While many of the category risks we discuss are not new, the concurrent timing of these coupled with increased focus on sustainability, heightened volatility and technological disruptions has presented unique challenges and opportunities.

We believe that reassessment and the resulting realignment are going to transform the way organizations work and force them to bring more clarity to their business model while also making their operations and supply chain more robust.

Inflation Continues to Impact Profit Margins

Lockdowns imposed in different regions to control the pandemic slowed down many global economies. Subsequent lifting of restrictions along with expansionary monetary policy and increased government spending lifted consumer demand, putting further pressure on supply. While this mismatch in supply and demand and the resulting inflation were considered 'transitory' and expected to stabilize, continued disruption and the Omicron wave have dampened the hopes of global economies to bounce back anytime soon.

High inflation makes it more difficult for procurement professionals to ensure supply and price stability. This could lead to higher operational and financial risk for organizations. To lower inflation’s impact on the bottom line, companies will have to tame costs and invest in programs that build greater resilience and stronger purchasing and pricing capabilities.2

Key Factors/Risks Impacting Supply Chain

As countries across the world grapple with shortages of pharmaceutical drugs, vaccines, semiconductor chips and commodities (the list goes on), governments are focusing on short-term goals for the benefit of citizens.

The supply chain, which is optimized with a singular world view, is at risk.

Lack of political alignment has led to trade wars between major economies. This is not only creating supply gaps impacting the consumers directly but also making it difficult for organizations to continue business as usual. The situation has been exacerbated by inward-looking policies of major economies.

Recently, in a forum convened by the World Economic Forum, leaders of the world's biggest companies from 17 countries reiterated the importance of governments to rise above geopolitical tensions and work towards better trade cooperation to address global resiliency and sustainability.3

Global Freight Battles Bottlenecks

When the early impact of the pandemic receded, demand picked up drastically. However, the global logistics infrastructure could not keep up. Lack of warehouse availability, sky-rocketing container rates, port congestion and trucker shortages, elaborated below, are the symptoms of a globalized industry struggling to keep up with rising demand.

  • High container rates: Unbalanced demand on various trade routes is incentivizing shippers to move vessels to more profitable routes, resulting in improper utilization of containers. This uni-directional flow of containers also led to many containers idling in Africa, without any vessels to move them. Cost of shipping from China to the U.S. West Coast has increased exponentially while the cost for the opposite route only rose by a fraction.4 Although the prices have started to normalize, full recovery will take time.
  • Congestion in ports: Ports on the U.S. West Coast and some in China have faced extreme congestion. This had a ripple effect on inland railways and roadways resulting in delays in the supply chain. The use of digital technologies to increase the throughput of the ports has become more crucial to ease the congestion and manage future disruptions.
  • Warehouse scarcity: People avoiding brick-and-mortar stores amid the pandemic accelerated the adoption of online retail. This led to a boom in warehouse demand, which could not be met with existing capacity and labor shortage. Warehouse scarcity is also prominent in and around port cities. This year, changing consumer behavior is likely to bring warehouses closer to the end consumer with businesses using idle spaces such as retail stores and malls for warehousing.
  • Shortage of drivers: The trucking industry has been struggling with driver shortage for many years because of low pay, long working hours and difficult working conditions. The pandemic and events such as Brexit have further restricted the movement of drivers.
Changing Priorities of the Workforce

Global GDP was expected to grow by 5.6% in 2021,5 resulting in huge workforce demand and high labor shortage across industries. According to the U.S. Bureau of Labor Statistics, millions of Americans quit their jobs in 2021.6 “The Great Resignation” trend is visible in many other economies too. Employees are not only resigning in favor of better paying jobs but are also looking to improve their physical and mental wellbeing. This has led to higher labor cost across the supply chain and created bottlenecks.

  • High workforce demand has enabled workers to demand higher pay and provided them an opportunity for them to reevaluate their career choices.
  • The last couple of years have been stressful for many employees, trying to manage personal and professional obligations in challenging times, and have compelled some to leave their jobs.
  • Workplace flexibility options such as work from home have become key enablers for employees to manage work-life priorities better and allowed more women to join the workforce.
  • Schools and support systems such as daycares are still not fully open, keeping people from working full time.
  • New variants of COVID-19 have discouraged employees from returning to office, even after vaccinations.
  • Restricted international mobility and slow immigration process have also impacted cross-border labor availability.
Increased Focus on Supply Stability and Resiliency

In a survey of C-suite executives by The Economist Intelligence Unit and GEP in 2021, 60% agreed that redundancy and resilience in their supply chains were more important than efficiency and agility, signaling a significant shift in strategy.7 This is not surprising given the unprecedented supply shortages and disruptions that companies faced because of pandemic-induced plant shutdowns, international trade restrictions and geopolitical tensions. Supply chain leaders were forced to take a hard look at their supply chain design and planning processes. Consequently, many concepts like just-in-time and Kaizen are being reevaluated. There is renewed focus on supply chain decoupling, diversification and modularity. The need for better visibility into supplier’s suppliers has also become critical. Many companies are starting to leverage intelligent technology to pursue these goals. But two years into the pandemic, companies are still struggling to achieve the balance between supply stability and costs.

Sustainability Has Gone Mainstream

Sustainability is no more just a business buzzword. It is gaining momentum and finding key place in strategy. Investors, consumers, and employees are expecting businesses to aim for bigger sustainability targets. Research shows companies with high environmental, social and governance (ESG) ratings have a lower cost of debt and equity, and that sustainability initiatives can help improve financial performance while fostering public support.8 Sustainability today covers several aspects of business.9

  • Environmental: 18% of GDP could be wiped off the global economy by 2050 if global temperatures rise by 3.2°C.10 Strategies to reduce carbon footprint and other environmental waste will not only preserve nature for future generations but also have a positive financial impact.
  • Social: By treating their employees fairly and contributing to the community they serve, companies can attract new talent and improve talent retention while also tapping into new markets and expanding existing ones.
  • Governance: Strong and effective corporate governance improves accountability and results in superior financial performance. Better alignment with shareholder interests (through transparent communication and engaged decision-making) helps in developing clear goals and making concerted efforts to achieve those.
Technological Disruption

2021 witnessed an impressive expansion in the number of unicorns or privately-held startup companies valued at $1 billion or more.11 These startups, in most cases, are competing with large enterprises by disrupting the existing business models. New technologies such as blockchain, artificial intelligence, robotic process automation and natural language processing have not only become mediums to transform a business but also a threat to organizations that are slow in adopting them. There are additional risks organizations need to prepare for, as they increase their dependence on technology.

One example is the cyberattack on a U.S. oil pipeline that disrupted supply of fuel to the East Coast for several days. This was not an isolated incident. Organizations need to work on a well-rounded strategy to achieve competitive advantage in the market while minimizing related risks.

Resulting Buyer Action

As organizations face additional risks due to supply chain disruptions, GEP Spend Category Outlook 2022 presents the key strategies we are implementing to help our clients achieve supply chain stability and drive their businesses to a sustainable growth path.

Supplier Collaboration

Supply chains often consist of multiple and ever-changing partners in different geographies with different specializations. Collaboration between these partners has become crucial to innovate and optimize various facets of the business for competitive advantage. Collaboration is needed for speed to market, but more importantly for effectively managing supply chain shocks due to events such as natural disasters, the pandemic, shifts in consumer preference, logistics bottlenecks and labor unrest.

Organizations are working on establishing the right tools and processes to increase the level of trust between all parties and rely on them during crucial times. These include:

  • Helping partners innovate: Companies are partnering with strategic suppliers to create custom solutions to customer problems. This is highly beneficial – the supplier has a ready market to pilot its innovative solutions and get real-time feedback to improve their offerings. On the other side, organizations can leverage the research capabilities of their partners to increase market share.
  • Increasing efficiency with operational optimization: The cost and speed of operations is dependent on every partner in the supply chain, and technology can be leveraged to help all of them work at optimum capacity. This involves establishing a process to clearly communicate the requirements, timelines, and any other specifications with the rest of the participants in the value chain (such as production, packaging, logistics and warehousing). This should include SOPs to make changes to the existing orders. It is also important for the downstream partners to transparently share their total capacity and its allocation to the respective client. This helps in developing a trusted relationship and reduces any last-minute changes to the schedule.
  • Preparing suppliers for future demand: An easy way to help suppliers provide the level of service expected from them is to give short and medium-term forecasts in a transparent manner. If this information is not available in a timely manner, suppliers have to rely on past orders, leaving them ill-equipped to manage any sudden change in demand or supply.

As more organizations focus on core competencies while relying on partners to help manage all other functions/activities, it has become critical to collaborate with them in a way that the business can compete successfully in the market.

Digitalization and Automation of Business Processes

IT spend was projected to grow at over 8%12, 13 in 2021, highest in the last decade. The growth is likely to stay high in 2022 as well. Companies are leveraging technology to support immediate business needs such as enabling employees to work remotely, mitigating supply chain risks and workforce churn and managing supply and demand volatility.

The key technologies being used to optimize the supply chain include:

  • Cloud: Small businesses to large enterprises are becoming more comfortable with adopting cloud technologies not only because of the low upfront cost but also enhanced security and the ability to scale up or down depending on business needs. According to estimates, the global cloud computing market will grow by $461 billion by the last quarter of 2025.14
  • AI/ML: Many labor-intensive business processes are being automated to provide faster service to the end customer and optimize cost. These technologies are also being used to augment existing workforce, such as in customer support to process more requests in lesser time and even automating decision-making.
  • Big data reporting: Organizations are working towards integrating disparate IT systems to be able to create reports/dashboards with actionable insights for the leadership. This in turn is fostering cross-functional decision-making and significantly increasing end-to-end value chain transparency.
Supply Chain Transparency

Supply chain transparency requires companies to know what is happening upstream in the supply chain and to communicate this knowledge internally and externally.15 Consumers and communities are concerned more than ever about what they are consuming and how the product is sourced.

Procurement leaders thus must gain more visibility not just into Tier 1 suppliers but also lower-tier suppliers to gather actionable insights about potential risks, opportunities for improvement and information gaps.16 Many companies leverage third-party partners to gain expertise not internally available.

Organizations can expect the following benefits by investing in a transparent supply chain:

  • Many governments are making more stringent laws requiring companies to own responsibility for their suppliers. A transparent supply chain helps the organization to comply with such requirements, saving time and money on litigations.
  • Organizations with a transparent supply chain can establish themselves as trustworthy. This helps them minimize reputational risk and develop better customer loyalty for their products and services.
  • Responsible and transparent organizations can attract and retain talent through better employee engagement and motivation.
  • More and more investors are looking into the performance of companies on ESG goals while making investment decisions.17 Transparent companies can secure funds from investors and approval from various stakeholders more easily.
Supplier Diversification and Nearshoring

COVID-19 has been a unique event with global impact and lasting after-effects. As suppliers spread across different regions struggle to fulfill demand, organizations are starting to evaluate and resolve supplier bottlenecks. One of the ways is regional diversification — sourcing of goods and services from the same region where they will be consumed. This limits the impact to the supply chain in case of disruptions. For example, companies from North America are looking at Mexico and Puerto Rico for labor intensive work18 while those in Europe are considering Western Baltic countries.

However, the strategy cannot be applied in all cases, especially for suppliers of semiconductor chips, electronic displays and specialty chemicals, which are concentrated in single regions.

China is a great example of such concentration for many industries. Companies trying to follow a “China plus one” strategy are looking at Southeast Asia for alternative supply sources. This shift, however, will take both time and investment to build all the related infrastructure, so that these industries can thrive in newer regions.

Another short-term strategy being considered is regional inventory, where excess inventory is stored in countries where it can be accessed on short notice, without refreshing the entire supply chain. The just-in-time model too is being reassessed to accommodate a just-in-case model where supply stability is prioritized for smoother business operations.

Direct Spend Categories

Chemicals

If 2020 was a year of disruption for the chemicals industry, 2021 was a year of marginal recovery. The first half of 2021 witnessed the chemical output return to pre-COVID levels.

However, the industry continued to be marred by challenges such as material scarcity, logistics issues, trade barriers and natural disasters. Chemical companies had to adapt to the new normal to overcome these challenges. While production and overall output increased globally, much uncertainty is still in the cards for 2022.

Overall, GEP expects global chemical production to grow in the range of 2% to 4% as compared to 2021, indicating a continued year of recovery. The United States will see the biggest production gains as many of the planned capacity additions will come to fruition, further boosting their already robust chemicals industry. Though China has experienced some structural changes to the way they operate due to regulations and power shortages, the Chinese output will be quite healthy and will feed most of the APAC markets.

GDP will rise in healthy numbers across most of the bigger industrial markets in 2022, and the focus for the industry across regions will be to improve workforce issues, especially in the shipping and trucking industries. Port congestion will continue to be a major problem; supply chain issues and delays will persist.

Though there are some U.S. government initiatives designed to unclog the bottlenecks at some of the country’s largest ports, no major improvements are expected until 2023.

North America

Capital spending is expected to further increase in 2022, indicating that the U.S. chemicals industry will register strong growth both in terms of output and shipments. The American Chemistry Council expects the U.S. output to increase by over 8% in 202219 compared to 2021. From an end-user standpoint, the demand for agrochemicals will rise significantly, followed by plastic resins, due to recovery in the construction and auto industry and the continued use of basic and specialty chemicals across electronics and semiconductors. The availability of basic feedstock such as ethylene and propylene will be abundant going into 2022, thus further bolstering the availability of important resins and improving the availability of some of the key derivatives.

Sub-Category Trends

Basic Feedstock and Polymers

Both polyethylene and polypropylene prices are dropping from record levels in 2021. Though they are not in freefall, 2022 will witness a downturn. However, inadequate power in China will begin to have a counter effect on the global resin market. 2021 marked a significant rise in plastic prices compared to previous years.

Most resin prices increased over 25%20 and some even reached an all-time high historically. 2022 will be relatively stable, and the prices for key resins like PE, PP, PET and other commercially used resins are expected to stabilize and even drop marginally as the supply situation improves. The availability of key feedstock like ethylene and propylene will be relatively balanced on the back of impending openings of new crackers in the U.S. such as Baystar’s new Texas cracker. However, demand from the PE/PP industry will be quite strong and the markets will remain balanced, counteracting any significant price drops.

Aromatics and Solvents

Benzene trade volumes in the U.S. have been strengthening since the beginning of Q3 due to higher demand from the styrene industry. The volumes imported in September and October were almost four times as high as that of August 2021. Demand from automobile and construction sectors for solvents like benzene and its derivatives will strengthen as supply chain challenges resolve and COVID-19-related uncertainty reduces.

New supply and derivative units that are due to come online in Asia by H1 2022 should eventually improve the global supply-demand balance. Extremely high freight costs could push back on tanker trade movements from the U.S. to Asia, with some relief expected gradually from Q2 2022. Methanol will correct itself during 2022 as the market stabilizes. Supply from the Middle East will find its way to India and Chinese markets. The wide price difference between India and China will result in cost-competitive imports of Chinese methanol to India.

However, the offers from the Middle East are expected to be more competitive. On average, Methanol CFR prices for India and China are expected to be between USD 350-400/MT during the initial months of 2022.21

Acids and Caustic Soda

Acids and caustic supply have been restricted since February 2021, when the winter storm knocked out approximately three-quarters of the U.S. production capacity. Combined with a series of outages and Hurricane Ida in August, supply tightened. The supply tightness will resolve as plants come back online, but the rise in electricity costs will be a factor for a price increase for the first half of 2022. The availability of key acids will continue to be at a premium, and markets will remain tense in the first quarter of 2022. For fatty acids, shortage of vessels, increasing freight costs (especially APAC) and labor constraints will contribute to major tightness in Europe moving into 2022. The settlements for the first quarter of 2022 will be on the higher side largely due to logistical constraints.

The availability of the material in the market will, however, remain sufficient. Large-scale buyers are advised to keep the significantly large lead times in mind when placing orders with key suppliers. Buyers who have the flexibility to switch between tallow and palm can hold back their purchases for Q1 until the market clears up but both material groups are facing bullish pressures. In terms of fatty alcohols, the tightness in the palm kernel segment is causing some overall concerns from a supply standpoint. Q1 and Q2 2022 prices will remain bullish due to raw material shortages coupled with logistical constraints.

Sustainability

The appetite for sustainability in the chemicals industry is high and will continue playing a vital role in addressing major global challenges like carbon emissions. Companies are working with their suppliers toward defining frameworks and targets to address key sustainability concerns.

Apart from reducing emissions along their value chain and taking a step towards carbon neutrality in their operations, companies need to focus on their extended value chain. The creation of a code of conduct and assessment of suppliers will be the first steps of the process. A robust audit process will also be essential to review and take corrective measures in driving overall success.

The industry is expected to witness a tighter regulatory framework from the likes of REACH, CLP, and other governing bodies to ensure carbon neutrality targets are met by 2050. The pressure to manufacture sustainably will provide an opportunity for many in the industry. Though environmental guidelines are, at present, more stringent in Europe than other regions, this will pick up more significantly in 2022; we have already seen significant movements on this front in China in 2021. When it happens, firms with involvement and exposure to modern and efficient production methods will be at an advantage.

What to Expect This Year

2022 will continue to be a year of recovery. Logistics shortages and distresses will likely linger and impact industries, but the lessons of 2021 in the form of building buffer capacity, planning for greater lead times, decongestion of ports and other initiatives to resolve these issues will eventually succeed. GEP expects 2022 to be a transition year for the chemicals industry, and anticipates it will slowly return to pre-COVID levels by 2023.

We advise the companies sourcing chemicals to refer to the following recommendations as they move into 2022:

  • Focus on local procurement: Procure locally as much as possible if the markets permit and until they stabilize.
  • Provide a rolling 12-month forecast to suppliers: This will significantly reduce exposure to risk.
  • Revamp and adjust supplier relationship programs: Companies with better supply relationships in place will be better prepared to reduce the impact of disruptions during market uncertainty through benefits such as delivery priority.
  • Optimize buffer capacity for critical material: Increase safety stock and move away from just-in-time orders for all critical materials until the markets stabilize. Also avoid last-minute purchases, especially for materials that have large lead times.
  • Build redundancy in the supply network: Add a second/third qualified supplier to global supply networks, specifically to mitigate geographical bottlenecks and build resilience.
  • Link prices to market indices as much as possible: This will ensure proximity to the market reality and a transparent pricing mechanism.

chemicals

Metals, Precious Metals & Agricultural Commodities

2021 was a turbulent year for both metal and agricultural commodities. It began with strengthening demand as economies started to open back up from Q1 through Q3. Due to the increasing global vaccination rate, many countries were able to emerge from their lockdowns and resume economic activity. However, supply was not able to ramp up at the pace of demand recovery, thus leading to a supply deficit in the earlier part of the year that drove prices upward for most commodities. As the year progressed, supply chain production issues for semiconductor chips dampened demand, causing pricing for metal-related commodities to eventually stabilize or decline.

Companies are facing various supply continuity-related challenges that call for improved planning and enhanced resiliency within the supply chain. Capacity and volume changes in the short and long term need to be addressed via better processes, digital supply chain optimization and improved supplier collaboration. As newer variants of COVID-19 evolve, there is still a looming threat of potential lockdowns across economies, which could further aggravate supply chain and transportation challenges — emphasizing the importance of securing supply first. Focusing on supply chain restructuring and supplier risk management is critical in current circumstances, though there may be opportunities to leverage stabilizing or softening prices for certain commodities when supply-demand dynamics improve.

Base Metals

Aluminum

Aluminum prices were originally predicted to grow at an incremental pace of 1% in 2021.22 Instead, prices increased dramatically and hit a 13-year high, with increasing demand and a combination of energy supply shortages, higher input costs and supply chain disruptions in China, India, Brazil and Jamaica contributing to the steep price incline.

Aluminum prices may continue to rise in 2022 if the demand from manufacturing industries remains strong and the ongoing strain on supply persists. Another potential impact to aluminum supply is magnesium scarcities and the inability of aluminum companies to purchase the necessary magnesium to harden aluminum alloys. Some suppliers have been implementing force-majeure clauses in their contracts in anticipation of this potential headwind;23 buyers should be cognizant of the possibility when purchasing aluminum supplies. When seeking to source aluminum, buyers should consider potential supply shortages and structure long-term contracts to ensure continuity, including penalties for failure to meet supply commitments. A preferred supplier approach with minimum volume commitments is a viable strategy in current circumstances. Inventory optimization is another option as long as carrying costs offset potential losses from supply shortages. Price management using financial hedges will be key to averaging out increasing commodity costs.

Copper

Copper prices were slated to rise 4% in 2021; however, they have remained volatile owing to significant changes in supply and demand. The price of copper experienced a steep incline at the beginning of 2021 due to a combination of strong demand and constraints on supply in Chile and Peru. Along with a continued rise in demand from industries such as electric vehicles and renewable energy, China increased its acquisition of copper as it placed greater investment into the country’s infrastructure and construction, thus resulting in a spike in overall global copper demand. Prices then dropped in Q3, largely influenced by a combination of the weaker global automotive production (due to the semiconductor chip shortage) as well as the slowing pace of China’s real estate market and the subsequent glut of copper in China due to earlier anticipations of demand.

Despite the relative downturn in copper prices in the second half of 2021, they are expected to rebound in 2022 due to continued increases in demand from the electric vehicle, battery manufacturing, and utilities industries, as well as the short-term strains on supply due to declining inventories and threats of worker strikes in Chile and Peru.24 A focused approach on copper supply continuity is critical to effectively managing this category in 2022, with similar price and supplier management strategies for other metals such as aluminum applied to copper as well.

Iron & Steel

While 2021 initially saw a dramatic increase in iron ore pricing — nearly 51% higher as compared to 2020 —  in Q3 iron plummeted from its June 2021 all-time high by 40%.25 With about 98% of all iron ore going toward steel manufacturing, the price is largely tied with the steel industry.26 The stark contrast in iron ore pricing is reflective of a sizeable drop in steel production and the reduction of supply chain issues among major ore exporters such as Brazil and Australia. Steel pricing, on the other hand, maintained its elevated levels throughout 2021 despite sustained demand and supply disruptions.

The general forecast on iron ore pricing appears to be trending downward for 2022 as countries like China must curtail their steel production during the winter months to meet their government’s energy emissions goals, lowering overall demand. There will also be an additional demand reduction in China due to its government implementing a 30% lower emissions output between January 1 and March 15, 2022. This is in part due to the Winter Olympics, where pollution levels are tightly regulated to improve air quality.

Levels of steel production saw a minor increase from the strong construction industry in 2021, although automobile production will most likely remain flat in the first half of 2022 due to the manufacturing slowdown caused by the semiconductor chip shortage bottleneck. It is likely that iron ore and steel prices will either stabilize or face downward pressure compared to their 2021 highs while continuing to be influenced by everchanging supply and demands from China, Brazil and Australia.27 Procurement insight points to closely monitoring steel supply as a function of the chip shortage. Tier 1 and Tier 2 supply risks will need to be mapped out in the supply chain, combined with an index-based pricing formula, to lock in pricing in a staggered manner throughout the year.

Nickel

Nickel prices rose sharply in 2021, driven by strong demand for stainless steel and batteries and weak supply due to strikes in Canada and flooding in Russia. Indonesia saw an increase in nickel production of 47% for ores and 55% for refined products as of Q1 and Q2 2021.28 Unlike other metals, nickel remains fairly stable as a nonvolatile commodity, owing to strong support from steady demand and supply for stainless steels (SS). The long-term future of the energy transition and the change in consumer preferences to EVs will support growth in the nickel industry for rechargeable batteries, although the short term will see a small decline in nickel prices due to increases in the supply from Indonesia.

Supply challenges across most regions producing nickel will keep pressure on pricing during H1 2022; this is expected to stabilize later in the year. Manufacturers have been pressured to buy 304SS at quoted prices to allow for continuous production at the manufacturing line. Other alloys such as 430SS are in short supply, which has led to a huge price premium for the available 304SS. With these types of market dynamics, it is expected that nickel prices will see a short spike toward the beginning of 2022, followed by an adjustment with a small trend downward.29 Although battery components within the EV space present exciting news, this only makes up about 10% of nickel consumption, whereas 70% is from stainless steels.30 Buyers may consider fixing their contracts to avoid price inflation early in 2022, then readjusting to a new price once the nickel supply in the market has increased.

Lead, Tin and Zinc

These metals are mainly used in the automotive and electronics industries for car batteries (lead), electronic solders (tin), and steel coatings (zinc). Their prices were on an upward trajectory in 2021. The demand for lead-acid batteries increased during the start of 2021 due to the chip shortage, which caused buyers to purchase more used vehicles, leading to more battery replacements of legacy vehicles. The need for consumer electronics drove tin prices significantly higher than other base metals, while zinc saw a price increase due to global power outages, decreasing the supply for the construction and housing industries.

All three metal prices are expected to drop from their historic 2021 highs, leading to a slight decrease in 2022 as the current price levels are not sustainable. Supply of lead will increase as it forms from a byproduct of zinc mining, which will drive prices lower. Once supply disruptions — mainly from the electronics industry of semiconductor chips — are resolved, demand and supply of tin will stabilize. Although demand for new automobiles will be high, supply should outpace demand. Mining of tin is expected to increase with the addition of several new mines in Indonesia and Malaysia, which should push prices lower for 2022. For zinc, large increases in production from Brazil, China, India, Kazakhstan and Mexico are expected. The disruption of property development in China due to the recent energy increases may suppress demand for zinc (galvanized steels) in the near term. As with aluminum, zinc uses large amounts of electricity to operate its electric arc furnaces for smelting. The recent power crisis across Europe and China has caused widespread production cuts to avoid inflated operating costs.31 To mitigate potential supply chain disruptions caused by the lingering effects of the pandemic, procurement teams should secure fixed volume contracts, with a staggered approach toward locking in pricing as it stabilizes during the year.

Precious Metals

Gold, Silver, Platinum

Precious metals have been a safe haven asset during the pandemic, with a large portion of their demand driven by investments and monetary policies implemented by central banks across the world. As economies started to bounce back in Q4 2020 and early 2021 and interest rate yields began to climb, these metals became a less attractive investment option, thus impacting their investment-related demand throughout 2021.

Silver and platinum, with their industrial demand ramping up primarily from the automotive, electronics and energy industries, went through price strengthening during the early part of 2021, which was further exacerbated by mining supply issues in South America, South Africa and Russia. However, improved mining output in the second half of 2021, coupled with the slightly declining production in automotive and electronics industries due to supply chain issues of other materials such as semiconductors, softened the pricing for these precious metals.32,33

2022 is expected to keep pricing in check thanks to improving supply and persistent demand challenges for investment purposes and other industrial manufacturing applications (taking into account shortages of other materials). Procurement functions will need to closely monitor monetary policy changes and account for potential fluctuations based on investments in each metal. Entering into long-term contracts to ensure supply continuity will be a sound approach despite the improving supply, as the demand from industrial manufacturing and automotive applications may remain volatile and ramp up suddenly, as was observed in 2021.

Agricultural Commodities

Wheat

Owing to weather issues in key exporting markets such as Argentina and Ukraine, wheat prices have continued to rise since the second half of 2020. Balance between production in the southern hemisphere and supply impact in countries such as Canada, the United States and Russia, along with strong export from Australia, determines stability in pricing.

For 2022, production in the southern hemisphere is expected to compensate for lower-than-expected yields in major producing regions of the northern hemisphere such as the U.S., Canada and Russia. India is expected to harvest a record crop during the current season, providing sufficient exportable surplus to the country’s neighbors and the Middle East. China has incentivized wheat production by increasing the minimum purchasing price for 2022, which will also contribute to the production forecast.34

Overall, upward pricing pressure is expected to persist despite a high (relative to historical standards) global stock-to-use ratio, as countries like the U.S. will see the lowest level of carryover stock since 2008.

Buyers will need to keep an eye on carryover stock numbers for the end of next season, as they could impact pricing for the upcoming season crop. Securing supply in a timely manner will be critical to avoid challenges and pricing pressure as a result of carryover stock depletion. Well-established hedging practices and discipline in commodity trading, along with strategic management of transportation charges covered under the basis component for grain millers and growers, will play a huge role in managing costs. Close collaboration with quality and technical teams to balance the ratio of winter and spring wheat while maintaining end product functional characteristics may provide support in case of potential supply constraints. 

Corn

Corn prices saw a significant fluctuation recently, primarily due to higher consumption growth in China and Latin America between Q4 2020 and Q1 2021. During this time, prices rose sharply to reach $245/mt, which was the highest since mid-2013. Chinese imports have recently diminished owing to use of cheaper grain alternatives for feed, thus weakening demand and restricting the surge in price as other supply factors offered a boost.

While the planting of corn in the U.S. is expected to be limited in 2022 due to the rising input price of fertilizer, global production in the current season (2021-22) is expected to grow moderately. This estimate is mainly attributed to higher expected yield in Latin America. Brazil’s corn crop is expected to see a significant yield along with an increased plantation area. Argentina, which is another major corn producer in Latin America and the third largest global exporter after the U.S. and Brazil, is expected to export a record crop during 2021-22. Corn production growth for 2022 will most likely outpace consumption growth, thus offering pricing relief.

Relative price stability might offer opportunities to lower commodity costs, however, increased ethanol usage must be closely monitored to maintain price ceilings with a robust hedging strategy for corn. Multiple applications and uses of corn may also trigger supply challenges coupled with transportation challenges that could remain prevalent in 2022.

Rice

India and China account for more than 50% of global rice supplies, while India and Thailand together account for close to 50% of total global exports. Attributed to concerns about export restrictions from 2020, rice prices reached a 7-year high in early 2021. Weather-related supply issues in the Philippines, Thailand and Indonesia were also key contributors fueling the rise. As export-related concerns did not materialize, price correction was observed in the second half of 2021.

Overall, pricing is expected to remain stable or marginally decline in 2022, owing to favorable growing conditions in major producing regions like India and China — thereby increasing production marginally, whereas demand may remain steady. India has been dominating rice exports, and is expected to continue doing so due to tighter exportable supplies from other markets.

Given the favorable supply situation and historically high stock-to-use ratio, it will be critical to ensure supply continuity in light of container and transport challenges. Commodity trend should offer opportunities to monitor pricing levels and lock volumes at opportune times.

Cocoa

Cocoa prices have largely remained unchanged, primarily due to favorable weather conditions in West Africa and Côte d'Ivoire, which are the world’s largest cocoa suppliers. As the season came to an end, production rose by nearly 10 percent YoY.

Slumped demand in the early stages of the pandemic picked up over the course of 2021, and is expected to increase marginally in 2022. While Nigerian cocoa production has been slow in the current season — primarily attributed to unfavorable rain patterns — harvest is expected to pick up and continue well into Q1 2022.35 Global production is expected to take a hit compared to the previous year as production in Côte d'Ivoire and Ghana is set to be curtailed due to unfavorable weather. The risks to price stem from lowered production estimates from leading producers. Organizations may wish to consider locking volumes for 2022 to cushion the impact of potential price rise.

Natural Rubber

Lower demand in the second half of 2021 saw the price of natural rubber stabilize, albeit 10% higher YOY. The lowered demand was primarily attributed to semiconductor shortages that led to a decrease in automobile sales, as natural rubber is a key material in manufacturing tires.

2022 may continue to see COVID-19-related potential supply side risks in the Southeast Asian region, though Thailand’s incentivized production in its recent Rubber Price Guarantee Scheme provides a positive outlook, with initiatives including cutting production costs and promoting use of rubber as raw material.36 Major demand side risks relate to the semiconductor shortage and how long it has an impact on the automobile industry. 2022 pricing for natural rubber is projected to remain softened on account of demand side risks, though restrictions in major producing regions need to be monitored. While demand may be lower due to other material shortages, there is a potential opportunity to lower overall costs by locking volumes in advance and carrying higher inventory if carrying costs are managed well. It will also avoid a potential supply concern when the automotive market ramps up demand once semiconductor constraints are eventually resolved.

Sustainability

Metals (Base And Precious)

The steel industry is a strong leader in sustainability due to its reliance on scrap metal recycling and the transition to natural gas versus coke and coal for lower overall emissions. Steel is the most recycled material in the world, with the U.S. leading in sustainable metal use over all other countries and China working toward catching up with their latest emission goals. The industry overall continues to improve its sustainability efforts by lowering CO₂ emissions through the use of more renewable resources and more environmentally friendly grades of steel, as well as plant innovations focusing on efficiencies.37

Alcoa has recently announced its “technology road map” to improve sustainability of its aluminum processes. Their key initiatives seek to increase decarbonization of alumina refining, increase the amount of post-consumer aluminum turned into reusable aluminum, and eliminate greenhouse gases released during the traditional smelting process.38

In the precious metals space, there have also been efforts to improve sustainability. Sandstorm has become the first precious metals royalty company, as well as one of the first North American metals and mining companies, to have established a loan structure related to sustainability and established KPIs. This measure means that Sandstorm’s credit facility will increase or decrease the borrowing costs based on whether sustainability performance targets are met.39

Agricultural Commodities

Major agricultural commodities producers across markets have undertaken initiatives to enable sustainable sourcing. Cargill, one of the leading agricultural companies, continues to work on its multi-year action plan through its public-private partnership (Cocoa and Forest Initiatives) in major cocoa-producing African countries. This is part of its larger strategic initiative, Protect our Planet, to eliminate deforestation from its cocoa supply lines by 2030. In addition, Cargill also partners with farmers, industry groups and its customers on its existing sustainability initiatives for cotton and maize.40

In 2021, ADM, another leading agricultural company, released its no-deforestation policy with an objective to promote and protect forests and biodiversity, aiming to eliminate deforestation from all its supply lines by 2030. The policy focusses on all its supply chains with an emphasis on its soy and palm oil lines.41 Syngenta, a UK-based provider of agricultural science and technology, plans to invest $2 billion by 2025 in sustainable agriculture initiatives through its Good Growth Plan. The company aims to reduce the carbon intensity of its operations by 50% by 2030.42

Packaging

Packaging category managers spent most of 2021 dealing with pandemic-related supply shocks and coping with inflationary headwinds on most input cost factors. These two facets were often at odds over the past year, pushing category managers to strike a careful balance between supply assurance and cost mitigation.

While several inflationary factors are expected to persist (and in some cases even worsen) in 2022, packaging buyers now have the opportunity to leverage the relative stability afforded by vaccine rollouts and glimmers of economic recovery. They can shift focus from short-term survival to a more strategic, longer-term vision for their category.

As we inch toward a new normal, category managers must discern which trends are long term, requiring strategic intervention, and which are temporary, calling for short-term measures to mitigate impact or leverage opportunity.

Paper and Pulp

Globally, paper-based packaging has seen a surge in demand, fueled by a broader rise in consumption as economies begin their recovery, and the shift of consumer preferences to e-commerce.

From a pricing perspective, unbleached kraft linerboard prices saw an increase of 14.5%43 in the United States and over 35%44 in major European markets such as Germany, Italy, the U.K., Sweden, and Poland.

Demand trends are expected to sustain well into 2022. IMF maintained a global growth projection of 4.9% in its October 2021 edition of the World Economic Outlook,45 with sustained growth in several markets such as Europe (3.6% to 4.4%), China (5.6%) and India (8.5%).

Consumer demand is also inherently tied to sentiment, and the mood is buoyant in major economies thanks to progress in vaccination levels. A large part of the associated packaging demand will have to be fulfilled by paper.

Starting 2022, countries such as France and Spain will ban the use of plastic for fresh food packaging46 while the U.K. is introducing a 30% plastic packaging tax.47

Even emerging markets, which have pushed back against sustainability pressures, will at best maintain the status quo. The shift to e-commerce is here to stay, as the pandemic simply sped up an existing trend away from brick-and-mortar stores in segments such as food and beverage (F&B) and retail.

On the supply side, several paper packaging companies reported a decline in margins driven by higher raw material, conversion, and logistics costs. Timber shortages persisted in 2021 owing to various local factors ranging from supply chain disruptions to forest fires.

In view of the demand- and supply-side pressures, it is likely that inflationary headwinds in paper or timber-based packaging will sustain over the next 12 to 18 months, if not longer. Packaging buyers are advised to invest in value engineering and packaging design evaluations, with a medium to long term view of benefit realization.

Engagement model reassessment may also provide benefits or mitigate against uncertainties. For example, enterprises can contract with the substrate manufacturers or partner with converters/printers to aggregate volumes if volumes are sizeable.

Paper-based packaging is inherently a format suited for near-sourcing.

However, the inflationary pressures on smaller converters (especially in emerging markets), coupled with their limited flexibility on cash management, prompts a comprehensive evaluation of supplier risk.

Buyers should identify converters with the right fundamentals and fit for their organization and develop them through this tumultuous time. This will enable “customer of choice” positioning and joint business planning, thus yielding favorable terms in a tough market and augmenting the buyer’s value engineering efforts.

America Kraftliner Trends ($/MT) – RISI

Source: RISI

Europe Kraftliner Trends (€/MT) – EUWID

Source: EUWID

Plastic Packaging

2021 was a year marked by a significant rise in plastic prices. Most resin prices witnessed increases of over 25%48 and some even reached all-time highs. By contrast, 2022 is expected to be relatively stable. No dramatic drop is expected though; a gradual correction is far more likely.

Both polyethylene and polypropylene prices are finally shedding off from record levels and are expected to continue a downward trend as the overall supply situation improves. But market factors in China may create some counter pressure on the global resin market.

Due to surplus availability of plastics in China, Asian resin prices had been much lower than in the West. However, energy shortages and regulatory changes are expected to result in some supply curtailment, thus reducing the East-West gap. The U.S. has enough material to cover global demand, but arbitrage from the U.S. to Asia will only make sense if the resin price gap drops substantially and ocean freight prices stabilize after a tumultuous 2021.

Most converters/processors that utilize the spot market for PE and PP will closely follow market movements and are expected to stock up significant volumes and build inventories when the timing is right.

Conversion costs, however, remain a matter of concern. Inflationary factors around energy, labor and logistics (covered earlier in this report) will maintain margin pressure on converters and limit the relief from the stabilization of resin prices.

China and India are introducing new laws around single-use and ultrathin/microbead plastics, but there is a sense of skepticism for the implementation of these laws, especially given the history and growth pressures amid the pandemic.

Regulations in Europe against plastic waste are expected to have a ripple effect with the U.S. However, economic growth in Asian markets, especially around retail and consumer goods consumption, will likely mitigate the demand impact.

On balance, the global need for plastic will likely remain steady through 2022, with a possible localized drop in certain European markets. From a pricing perspective, contracts negotiated during the highs of late 2020 and 2021 should be revisited.

Actions can range from a comprehensive market test to a fact-based discussion with strategic suppliers, depending on product criticality, demand outlook and outcomes of the last contract discussion. As part of the review, buyers should also establish appropriate index-linked, price review clauses, which may have been severely tested over the last 12 to 18 months.

Investment in longer-term, strategic projects around redesign and value engineering in plastic packaging is and will remain a tricky proposition in the foreseeable future. A country and format-specific evaluation is warranted. For example, single use plastics in food packaging are on their way out in most markets, and organizations operating in this industry should aim to move toward more sustainable forms of packaging.

However, use of rigid packaging in industrial applications is likely to remain, as there are few viable alternatives. In such cases, the actions of major suppliers are often a marker of where the industry will be headed, as they are closest to the market and make significant investments in machinery and molds based on medium-long term outlook. A strategic review of the supply base’s product roadmap and investments should be considered a vital input to the buyer organization’s decision making.

Metal & Glass

Aluminum prices exhibited a steady upward trend in 2021 due to strong demand-recovery from end use sectors coinciding with production disruptions. China, the world’s largest primary aluminum producer by a distance, attempted to blunt the price rally in Q3 by facilitating production increase and boosting coal production. However, these measures were unable to have a significant impact on the industry, as energy shortages drove prices back up by the end of Q3.

Prices are not expected to witness a slowdown anytime soon, as global demand will only increase with economic recovery, while supply will be constrained amid stricter emission controls and rising power charges in China.

F&B manufacturers looking at glass bottles as a savior from metal prices aren’t in for much luck either. In the U.S. for example, producers of a variety of goods ranging from pasta sauces to fine wine were hit with supply chain pressures driven by rising domestic and international logistics prices. 20% to 30% of F&B bottles in the U.S. are imported from Europe or Asia,49 and were severely hit by disruptions to the ocean freight market.

The situation is expected to exacerbate, as demand for glass will only strengthen with economic recovery and a push toward eco-friendly packaging in several key markets. There is also increased demand from the cosmetics industry, which moved toward plastic couple of decades ago, but is now gradually moving back into glass and offering refillable options.

A cross-functional team with representation from different roles, ranging from supply chain to marketing, is best-placed to develop a long-term packaging strategy that is closely aligned with product strategy. This team can work with key suppliers and develop the company’s packaging roadmap for a post-COVID world. In the near term, a greater emphasis will be needed on supply chain flexibility and reliability. Buyers should develop a clear understanding of their packaging suppliers’ inventory and contingency plans and evaluate near-shore options where previously dependent on global supply chains.

Sustainability

Sustainability took a back seat to hygiene and safety concerns in 2020 and early 2021, with many applications turning to single-use packaging or higher-footprint formats of packaging to reduce actual and perceived COVID transmission risk. However, several climate change events spanning multiple continents are forcing governments and corporations to renew efforts towards sustainable supply chains. Packaging remains one of the most “visible” focus areas for sustainable practices and products.

Regardless of skepticism around implementation of regulations, organizations are best advised to develop a holistic view of sustainability in packaging, encompassing elements such as material usage reduction, energy efficient processes and recyclability.

While regulations will inform packaging strategy, “chasing” them often results in hurried and sub-optimal solutions, often with significant financial implications. Developing a sustainability scorecard across the packaging portfolio is the first step towards identifying priority areas and creating a “project pipeline.” This should be followed by due diligence of existing and upcoming technologies or products which are best placed to address the pipeline.

Sustainability isn’t simply about ditching plastic for paper or glass. When implemented correctly, closed-loop solutions for packaging significantly reduce raw material consumption and carbon footprint, while simultaneously reducing cost.

It’s also worth noting that significant innovation is being driven by startups or small-scale companies that are seeking investment and business knowhow to take their concept to the next level. Supplier collaboration and development in areas having the greatest impact are key to identifying viable solutions.

A long-term view, informed by operational, sales and regulatory considerations will yield the most optimal results.

What to Expect This Year

Inflation is likely to continue or perhaps accelerate in 2022. That will have a significant impact on the cost and availability of packaging materials. As packaging demand mirrors consumer attitude and preferences, the future of packaging is closely tied to the economy and sustainability concerns.

For paper and pulp, even if disruptions to raw material supply subside in 2022, there is no hint of any let up in conversion and logistics costs. Several countries are experiencing unprecedented labor market disruptions and energy and fuel shortages. Supplier consolidation witnessed over the past couple of years is expected to continue, as major players look to improve scales and build leverage to pass on cost increases to customers.

Long-term demand outlook for plastic packaging remains a contested subject. Recent actions around banning plastic packaging for fresh foods in the E.U. and imposing a “plastic packaging tax” in the U.K. are expected to impact medium-term demand in that part of the world. However, the picture in growth markets is not as clear.

As with paper packaging, the outlook for metal and glass packaging remains driven by inflation. Industries such as pharma and beverages should draw up a value engineering priority list based on their portfolio. Most metal and glass packaging applications are primary in nature (i.e., have direct contact with the manufacturer’s product), thus having significant impact on the supply chain and/or brand value and often requiring considerable regulatory approval before any change.

Packaging

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Capital expenditure (capex) has shown signs of recovery after a dip in 2021 due to supply chain disruptions amid COVID-19. Global corporate capex is set to surge in 2022 — all regions will see growth, across broad sectors and industry groups. Semiconductors, retail, software, housing and transportation sectors are expected to see the largest boost in their capex spending. On

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