Quantifying Sourcing Risk: Building Commodity Risk Ratings to Mitigate Geopolitical Uncertainty, Commodity Volatility, and Conflict Minerals Risk
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Do you know the drivers of commodity volatility? Do you know the impact of conflict minerals regulations on supply and demand? Commodity volatility and materials risk have plagued buyers in recent years, and today’s volatility is felt throughout the supply chain to a greater degree and at a greater speed than in previous decades. oin IHS for this 1-hour webcast where experts will discuss quantifying supply chain risk with specific focus on commodity risk, country risk, and compliance risk. They will outline the importance of having supply chain intelligence to address topics including: - Quantification of risk: understanding the interaction between concentration of production and political instability - Comparing commodities: evaluation of different commodities to identify the relationship between inputs, high risk, and volatility of price - Regulatory risk: current impact of conflict minerals regulations on material pricing and availability A recording of this presentation can be viewed here: http://www.slideshare.net/ihs_supplychain/quantifying-sourcing-risk-building-commodity-risk-ratings-to-mitigate-geopolitical-uncertainty-commodity-volatility-and-conflict-minerals-risk-26064687
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Quantifying Sourcing Risk: Building Commodity Risk Ratings to Mitigate Geopolitical Uncertainty, Commodity Volatility, and Conflict Minerals Risk
- 1. Quantifying Sourcing Risk: Building Commodity Risk Ratings to Mitigate Geopolitical Uncertainty, Commodity Volatility, and Conflict Minerals Risk June 27, 2013 Welcome to Today’s Webcast
- 2. Copyright © 2013 IHS Inc. All Rights Reserved. Before We Get Started • Ask questions any time • Type questions into the “Ask a Question” area, click ‘submit’ • The slides advance automatically throughout the event • Need help? Click the Help(?) icon below
- 3. Copyright © 2013 IHS Inc. All Rights Reserved. Live Tweet today’s webcast: #IHSWebcast 3 Join the Conversation: Follow @IHS4SupplyChain on Twitter
- 4. Copyright © 2013 IHS Inc. All Rights Reserved. 4 We Want Your Feedback on Today’s Topics
- 5. Copyright © 2013 IHS Inc. All Rights Reserved. 5 Today’s Speakers Rory King Director, Global Product Marketing, IHS Rory King is Director, Global Product Marketing at IHS. In this role, King is responsible for go-to-market strategy and product marketing for IHS offerings that address market initiatives in Product Lifecycle and Supply Chain Management, as well as Environmental Health & Safety and Sustainability. Prior to IHS, King held positions at information management and supply chain technology providers i2 Technologies, Aspect Development, and Requisite Technology. Most recently, King’s efforts have earned more than ten individual and team-based awards in areas relating to supply chain excellence, environmental compliance and sustainability. These include receipt of company-based Excellence and Leadership Team awards, industry recognition as a Supply Chain Pro to Know, and key contributions among teams winning the Green Supply Chain Award and Supply Chain Top 100 award honors.
- 6. Copyright © 2013 IHS Inc. All Rights Reserved. 6 Today’s Speakers Paul Robinson Senior Economist, Pricing & Purchasing, IHS Senior Economist, Pricing and Purchasing Group, IHS Global Insight Paul Robinson is an economist in the IHS Global Insight Pricing and Purchasing group. He is a graduate of the George Washington University, where he earned a BA in economics and international affairs with a concentration in international economics. He currently works in the ferrous metals division, specializing in raw materials and assisting on the Steel Monthly, Steel Industry Review and Weekly Pricing Pulse publications. Paul has spoken about commodities at a number of conferences, including IHS conferences in Monterrey, Mexico (Commodities Outlook: Will Renewed Economic Growth Bring Higher Costs? ) and Mexico City, Mexico (Commodities Outlook: Purchasing Strategies for 2011), as well as the Association for the Advancement of Cost Engineering (AACE) conference in Anaheim, CA (Economic Risks To Consider Before Bidding Your Next Contract).
- 7. Conflict Minerals Regulation A Look At Geopolitical Disruption to Supply & Demand Equilibrium Rory King Director, IHS Supply Chain 27 June 2013
- 8. © 2013 IHS Four conflict mineral commodities are regulated • “Conflict minerals” are pervasively-used commodities • Tin • Tungsten • Tantalum • Gold • In the DRC, conflict minerals finance armed groups who control population with rape and violence • They are regulated in U.S. Dodd- Frank with SEC Final Rule • 2013 is the first reporting period with filings due May 31, 2014 8
- 9. © 2013 IHS Regulations are contested… will that matter? • Unrelenting social pressure • NGO and consumers • Ongoing regulatory debate • Legal challenges to SEC • Will regulation curb violence? • Activity in other jurisdictions • U.S. States • Canada • EU • Australia 9 Slavery is Not a Game: 430,558 have emailed Nintendo asking them to take credible steps to ensure slave-mined minerals are not in their gaming consoles -- and Nintendo has not responded with action. Source: Walk Free Organization, June 2013
- 10. © 2013 IHS Where is industry at? Roughly 25% of electronic components have conflict-free disclosures today 10 Source: IHS Electronics & Media Conflict Minerals Service, June 2013 Available Conflict-Free Disclosures/Declarations Component Manufacturers as of June 3, 2013 While a step in the right direction, progress and position statements are not disclosures.
- 11. © 2013 IHS You care because such regulations are disruptive to supply-demand equilibrium Innovators Early Adopters Early Majority Laggards Late Majority time (years) IHS has shown that organizations approach adoption to environmental, social, and sustainability regulations at rates consistent with innovation adoption theory. Companies tend to approach regulations in groups of similar behavior, including: innovators, early adopters, early majority, late majority, and laggards
- 12. © 2013 IHS This means a (long) period of instability due to bifurcation of traditional behaviors Supply Demand Product S1 D1 P1 S2 D3 P2 Innovators Early Adopters Early Majority Laggards Late Majority time (years) “compliant” supply chains “non-compliant” supply chains
- 13. © 2013 IHS EU RoHS illustrates how regulations disrupt component price and availability Purchase Price: Price variation factor as of May 30, 2008 Availability: Total RoHS-related EOL vs. RoHS-compliant NPI as of January 1, 2010 Source: IHS Parts Intelligence, June 2013 EU RoHS 6 in this context are lead, mercury, cadmium; hexavalent chromium, PBB and PBDE
- 14. © 2013 IHS You really care because price and availability impact your ability to meet KPI • Your top-five most important key performance indicators* 1. Total Cost Savings Achieved 2. Attainment of Cost Savings Target 3. Purchase Price Variance (PPV) 4. On-Time Delivery 5. Continuity of Supply • Regulations impose change to equilibrium that undermines KPI *Source: IHS Pricing & Purchasing Audience Survey, April 24, 2013 14
- 15. © 2013 IHS Beyond regulation, geopolitical risk at the source correlates with price volatility 15 Source: IHS Economic & Country Risk, June 2013
- 16. © 2013 IHS In addition to price volatility, geopolitical issues threaten to disrupt supply chains Country Risk Forecast: Mineral Producing Regions (e.g. Gold) What is the risk? Source: IHS Economic & Country Risk, June 2013
- 17. © 2013 IHS For instance, turmoil in Mali poses a threat to mining operations and infrastructure 17 Risk forecast Property risk Source: IHS Economic & Country Risk, June 2013 Country Risk Forecast: Mineral Producing Regions (e.g. Gold)
- 18. © 2013 IHS So, what about conflict minerals regulation? Here’s what our audience had to say… 18 Source: Quantifying Risk Audience Poll, June 27 2013 What’s your company’s typical adoption of environmental or social regulations?
- 19. © 2013 IHS Conflict minerals are great leadership opportunity for you and your organization Commodity influence… What you can do about it… Social Pressure Get engaged with industry and peers ►Get ahead of the herd on the public relations front Early adoption = competitive advantage Late adoption = market failure/restriction Regulatory Compliance Track regulations and embrace inevitability of outcomes ►Use supply chain benefits to justify early action Competitive advantage Improve supplier collaboration Gain multi-tier visibility Identify supply chain vulnerabilities Establish resiliency / risk & security monitoring Price Volatility Get religious about price monitoring and drivers of cost ►Become proficient at timing buys strategically Geopolitical Risk Correlate your key commodities with associated regions ►Institutionalize economic & country risk monitoring 19 My perspective: You cannot change nor ignore the behaviors of a globally-integrated supply chain in transformation – only monitor and manage the implications thereof
- 20. Quantifying Risk A Look At Commodity Risk and Country Risk Interaction Paul Robinson Senior Economist, Pricing & Purchasing, IHS 27 June 2013
- 21. © 2013 IHS 21 About IHS Pricing & Purchasing The IHS Pricing & Purchasing Service enables supply chain cost savings by providing timely, accurate cost and price analysis. Armed with a better understanding of suppliers' cost structures and market dynamics, organizations can effectively negotiate prices, strategically time buys, and boost the bottom line. With a database of more than 80,000 historic prices and thousands of price, wage and input cost forecasts, IHS offers more coverage than any other provider in the market. IHS has been providing forecasts of key commodity, labor, and input costs since 1970 -- helping define the purchasing advice industry. Learn more, visit ihs.com/PricingPurchasing
- 22. © 2013 IHS 22 Agenda • Volatility explained: What is it and why does it matter? • Where have we been: A recent history of volatility • Building commodity risk ratings: A way to quantify the interaction of country risk and commodity risk
- 23. © 2013 IHS 23 Agenda • Volatility explained: What is it and why does it matter? • Where have we been: A recent history of volatility • Building commodity risk ratings: A way to quantify the interaction of country risk and commodity risk
- 24. © 2013 IHS Volatility Explained • What is it? • Variation in price over time • How is it measured? • Standard deviation • CBOE’s VIX (equities) • Implied volatility in S&P 500 index options – risk compensation • Why does volatility matter to you? • Timing buys • Coping with changing inventory values • Makes planning more difficult 24
- 25. © 2013 IHS 25 Agenda • Volatility explained: What is it and why does it matter? • Where have we been: A recent history of volatility • Building commodity risk ratings: A way to quantify the interaction of country risk and commodity risk
- 26. © 2013 IHS Recent History of Volatility Standard Deviation of MPI (52-Week Moving Average) Chicago Board of Options Exchange VIX Index 26
- 27. © 2013 IHS Volatility Drivers – Micro • Just in time inventory (JIT) • Lengthening supply chains • Example: Japan earthquake • Supply boom/bust cycles • Example: Shipping Inventory/Shipments Ratio 27
- 28. © 2013 IHS Volatility Drivers – Macro • Monetary policy – liquidity • Exchange rates - dollarization • Exchanges (ETFs)/High frequency traders • Country risk 28
- 29. © 2013 IHS 29 Agenda • Volatility explained: What is it and why does it matter? • Where have we been: A recent history of volatility • Building commodity risk ratings: A way to quantify the interaction of country risk and commodity risk
- 30. © 2013 IHS 30 Premise • A key part of the risks associated with buying a given commodity is the risk of the country you are sourcing from • Items such as “Conflict Minerals” have gotten a lot of attention, but the truth is that the operating environment in many countries is subject to high levels of risk • We can develop a quantitative method for capturing country risk as a way of better understanding commodity price volatility
- 31. © 2013 IHS Selected Commodities… Energy • Oil • Coal • Natural Gas Ferrous Metals • Iron Ore Non-Ferrous Metals • Aluminum • Chromium • Copper • Lead • Manganese • Molybdenum • Nickel • Tin • Zinc 31
- 32. © 2013 IHS 1. Gather the (Production) Data Energy • Oil (IEA) • Coal (World Coal Association) • Natural Gas (IEA) Ferrous Metals • Iron Ore (USGS) Non-Ferrous Metals • Aluminum (WBMS) • Chromium (WBMS) • Copper (WBMS) • Lead (WBMS) • Manganese (WBMS) • Molybdenum (WBMS) • Nickel (WBMS) • Tin (WBMS) • Zinc (WBMS) 32
- 33. © 2013 IHS 2. Ranking the Largest Producers 33
- 34. © 2013 IHS 3. Calculating the Concentration Ratios • Highly concentrated production is risky in any country • Capture difficult risks like weather (Australian floods) and geography (Straits of Hormuz) • Calculate share of top 4 producers 34 Iron Ore Millions of Metric Tonnes China 1300 Australia 525 Brazil 375 India 245 Top 4 Total 2445 Global Production 3000 Top 4 Concentration Ratio 0.82
- 35. © 2013 IHS 4. Developing Country Risk Scores • Calculate scores for additional country specific risks • IHS Exclusive Analysis • Intra-national location specific risk • IHS Global Risk Service 35
- 36. © 2013 IHS 5. Weight Country Risk Ratings by Production • Simple weighted average of the individual country risk ratings to create a commodity risk rating • Multiply by the concentration ratio from step 3 to take into account additional risks 36 Commodity Top 4 Producing Countries Production IHS Country Risk Rating Top 4 Weighted Average Risk Rating Iron Ore Total 3000 China 1300 14.35 7.63 Australia 525 3.19 0.68 Brazil 375 6.68 1.02 India 245 6.77 0.68 10.02
- 37. © 2013 IHS 6. Gather the (Price) Data Energy • Oil (IMF) • Coal (IMF) • Natural Gas (IMF) Ferrous Metals • Iron Ore (IMF) Non-Ferrous Metals • Aluminum (LME) • Chromium (AMM) • Copper (LME) • Lead (LME) • Manganese (AMM) • Molybdenum (AMM) • Nickel (LME) • Tin (LME) • Zinc (LME) 37
- 38. © 2013 IHS 7. Calculate Standard Deviations 38 … ...Or just let a computer do it for you 3 Year standard deviation of the monthly percent changes of each variable
- 39. © 2013 IHS 8. Interpreting the Results 39
- 40. © 2013 IHS Assessing the Outliers – Natural Gas Why is natural gas more volatile than its scores show? •Seasonality •Difficult to store/move •Artificially low score (United States) 40
- 41. © 2013 IHS Assessing the Outliers – Tin Why is tin less volatile than its scores show? •Hedging (LME) •Long history operating in elevated risk countries •Mines close to ports or even offshore 41
- 42. © 2013 IHS SURPRISE! Oil and Copper Low Risk/Low Volatility? •Still volatile, just not as volatile as some •Growing production in United States; Growing stability in Chile 42
- 43. © 2013 IHS Conclusion – This is just the beginning Improvements: • Build commodity risk scores based on exports, not production • Group oil producers locked within the Straits of Hormuz with Iran’s score 43 Go build commodity risk scores!
- 44. Copyright © 2013 IHS Inc. All Rights Reserved. Thank you! Paul Robinson Senior Economist, Pricing & Purchasing Service paul.robinson@ihs.com
- 45. Copyright © 2013 IHS Inc. All Rights Reserved. 45 IHS Global Commodity Risk Scorecard *Offer limited to qualified entities until July 30th, 2013. Limited time offer to all attendees…
- 46. © 2012, IHS Inc. All Rights Reserved. Best Practices in Strategic Sourcing & Procurement Resilient Supply Chains: How to Dynamically Manage Risk, Opportunity, and Business Continuity July 11, 2013 | 8 AM PT /11 AM ET / 4 PM BST •Who is at risk from supply chain disruption? •What does it mean to be resilient? •Where do traditional approaches to risk fail? •Why are leaders re-tooling their super-lean supply chains? •How can your organization sense and respond to change?
- 47. Copyright © 2013 IHS Inc. All Rights Reserved. 47 We Want Your Feedback on Today’s Topics
- 48. Copyright © 2013 IHS Inc. All Rights Reserved. For More Information Send questions and requests for information to: Webcasts@ihs.com Visit IHS.com/PricingPurchasing for more information 48
Notas del editor
- 07/22/13 19:58
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- “ Conflict minerals” are used pervasively throughout industries Tin Tungsten Tantalum Gold Around the DRC mineral resources finance armed groups using rape and violence to control population and mining Regulated in U.S. Dodd-Frank and subsequent SEC Final Rule in 2011 Requires conflict mineral disclosure & due diligence for certain publically traded companies and their suppliers Reporting began in 2013 and filings are due May 31, 2014 The United States Congress initially took up the conflict minerals issue in 2009 in a bill sponsored by Senator Sam Brownback (R-KS). The evolving issue would eventually manifest itself into a bill passed on July 21, 2010 within six-page legislative provisions in the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Section 1502 of Dodd-Frank specifies several minerals as being potentially “conflict minerals,” including cassiterite, columbite-tantalite, wolframite and gold. These are frequently cited as tin, tantalum and tungsten, and gold (or 3Ts plus gold) used pervasively within electronics such as smart phones or laptops that rely considerably on these materials to perform critical functions. Certain publicly traded companies and their suppliers must now disclose whether they use conflict minerals in their products, and what efforts they have undertaken to ensure their use of the minerals does not contribute to human atrocities in the Democratic Republic of Congo (DRC) and adjoining countries. The first reporting year commences January 1, 2013 with filings due May 31, 2014. The complex and time-consuming nature of communicating, collecting, analyzing, and preparing information on mineral sources across a globally diverse, multi-tier supply network, gives companies little time to act. Everything from capacitors, cell phones, and GPS systems to hearing aids, pacemakers and even jet engines make use of circuitry, finishes, alloys or other materials that contain these materials. Practical implications of the law include both potential penalties for failing to comply with the SEC reporting requirements as well as the risks associated with an inability to respond adequately to customer or third-party requests. Meanwhile, companies discovering that their products contain these controversial materials may naturally seek to source new parts and materials from conflict-free sources. 07/22/13
- The law has been criticized by many for not addressing the root causes of the conflict. There have been legal challenges to the SEC. My question to industry: Are the consequences to brand and market acceptance – notwithstanding regulation – a risk worth waiting ? 07/22/13
- IHS offers industry’s largest database and tools for over 340 million electronic, electro-mechanical, and fastener components used in commercial and military application. It contains millions of components with conflict minerals information regarding tin, tantalum, tungsten and gold used in these products. Despite great progress made by many electronics firms like Cabot, Cisco, Intel, or HP data from our databases acts as an objective barometer for industry’s true readiness for conflict minerals disclosure. Intuitively, this midstream index on electronic components covers suppliers of components between the mineral sources and commercial and consumer products. It tells us that less than 20% of electronic component makers offer public disclosures available to their customers. As of June, 19.2% of manufacturers offered conflict free declarations although this reflected a sizeable 7% jump in the past month. I often hear about how this information must not take into account all of the great work done by companies making progress on the conflict minerals issue. Well, in full candor, this is an objective an unbias view of the aggregate electronic component industry from leader to laggard. And, progress is part of the journey, not the destination. And, I’m told in a June 2013 issue of Compliance Week that an article written by Joe Mont discusses Hewlett-Packard’s approach to conflict minerals compliance and quotes Jay Celorie, Manager of H-P’s conflict minerals program stating even “HP’s work is still in the early and evolving stages.” 07/22/13
- Similar to disruptive innovation theory, IHS studies have repeatedly shown that organizational adoption to regulations focused on environmental, social, and sustainability pressures resemble discontinuous innovation. Everett Rogers, a professor of rural sociology, popularized the theory in his 1962 book Diffusion of Innovations. He said diffusion is the process by which an innovation is communicated through certain channels over time among the members of a social system. Diffusion of Innovations is a theory that seeks to explain how, why, and at what rate new ideas and technology spread through cultures. Everett Rogers, a professor of rural sociology, popularized the theory in his 1962 book Diffusion of Innovations . He said diffusion is the process by which an innovation is communicated through certain channels over time among the members of a social system. The innovation must be widely adopted in order to self-sustain. Within the rate of adoption, there is a point at which an innovation reaches critical mass.The categories of adopters are: innovators, early adopters, early majority, late majority, and laggards An innovation that creates a new market by applying a different set of values, which ultimately (and unexpectedly) overtakes an existing market A disruptive innovation is described as an “innovation” that helps create a new market and value network , and eventually goes on to disrupt an existing market and value network (over a few years or decades), displacing an earlier technology. The term is used in business and technology literature to describe innovations that improve a product or service in ways that the market does not expect, typically first by designing for a different set of consumers in the new market and later by lowering prices in the existing market.
- Regulation requiring disclosure or restriction of specific minerals, chemicals, and materials introduces a disruption to supply chain equilibrium By the time social pressures manifest into regulatory obligation, an irreversible displacement has been as initiated by leading players within effected supply chains It is a transformative period lasting for years – or decades – as companies must adapt to new market requirements which displace traditional ecosystems Adoption varies by company in a predictable fashion over time – from visionaries and early adopters to laggards – behavior that lasts well past the regulatory deadlines This period is characterized by price and availability instability for materials in scope due to the bifurcation of traditional supply and demand pools
- EU RoHS 6 in this context are lead, mercury, cadmium; hexavalent chromium, polybrominated biphenyl (PBB) and polybrominated diphenyl ether (PBDE).
- The scores in Foresight range from 0.1 to 10 and are split into five risk level bands. They capture both frequency and severity of risk over the forward one-year time-frame. A high score may indicate a high frequency of low impact events, or a low frequency of very high impact events. ‘Impact’ may refer to asset damage, business disruption, or interference with personnel. 07/22/13
- The scores in Foresight range from 0.1 to 10 and are split into five risk level bands. They capture both frequency and severity of risk over the forward one-year time-frame. A high score may indicate a high frequency of low impact events, or a low frequency of very high impact events. ‘Impact’ may refer to asset damage, business disruption, or interference with personnel. 07/22/13
- First Mover – We wait for no one and set our own standard A Fast Follower – Not the first but quickly among companies leading the way Early Majority – Conservative; wait and see what others do first Late Majority – Skeptical; compliance enforcement or standards must be established Last to Adopt – Reluctant; only if we absolutely must act or are forced to 89.6% say such regulations have required a change in their behavior or a modification to products, services, or materials the organization relies upon 63.1% say conflict minerals regulations were important or very important to their organizations 07/22/13
- Regulation requiring disclosure or restriction of specific minerals, chemicals, and materials introduces a disruption to supply chain equilibrium By the time social pressures manifest into regulatory obligation, an irreversible displacement has been as initiated by leading players within effected supply chains It is a transformative period lasting for years – or decades – as companies must adapt to new market requirements which displace traditional ecosystems Adoption varies by company in a predictable fashion over time – from visionaries and early adopters to laggards – behavior that lasts well past the regulatory deadlines Economic and country stability of sources for materials correlates to price volatility while geo-political risk can threaten to disrupt supply chains 07/22/13
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