PRICING & PURCHASING SUMMIT WASHINGTON DC | NOVEMBER 11-12 2014 PRICING & PURCHASING SUMMIT

Global Pricing Environment: Is the Buyer’s market Finally Coming to an End? 11, November 2014 John Mothersole Director of Research, Pricing & Purchasing +1 202 481 9227 John.Mothersole@ihs.com

Setting the Stage: Recent Data Agenda Setting the Stage: Recent Data Commodity prices and the MPI Producer prices Consumer prices Other indicators What Does the Correction in Commodity Markets Mean? From Supercycle to an Era of Abundance? Reasons to think the price increases will stay contained Concluding Thoughts

The buyer’s market will carry into 2015 Pricing & Purchasing Summit / November 2014 The buyer’s market will carry into 2015 Five years into the recovery and the shift away from buyers has barely begun – quite unlike all other post-war recoveries The recent drop in commodity prices all but guarantees favorable buying conditions through the first half of next year Moreover, even with their correction, real prices suggest the adjustment may continue for some time Conditions will change, though the transition will be prolonged

The forecast: commodity prices continues to look contained Pricing and Purchasing Summit / November 2014 The forecast: commodity prices continues to look contained

Recent Data – a Broad and Deep Retreat Pricing & Purchasing Summit / November 2014 Recent Data – a Broad and Deep Retreat

Energy Oil: down 20% since January Pricing & Purchasing Summit / November 2014 Energy Oil: down 20% since January

Iron Ore and Steel Scrap Pricing & Purchasing Summit / November 2014 Iron Ore and Steel Scrap The “Big 3” grab for market share has sent ore prices plunging

Pricing & Purchasing Summit / November 2014 Chemicals and Rubber Chemical prices have only just begun to reflect the drop in oil prices Thai Government announces sale of rubber stockpile

Pricing & Purchasing Summit / November 2014 Lumber and Pulp Lumber prices are down so far this year in spite an improvement in home building

Pricing & Purchasing Summit / November 2014 A broader perspective – commodity prices are no different now than in late 2011

Goods prices are falling in the Eurozone and in China Pricing & Purchasing Summit / November 2014 A more complete view of supply chains: top-line producer price inflation is showing no acceleration Goods prices are falling in the Eurozone and in China

Likewise top-line consumer price inflation looks benign Pricing & Purchasing Summit / November 2014 Likewise top-line consumer price inflation looks benign

The “leverage” gauge shows no real tightening since late 2013 Pricing & Purchasing Summit / November 2014 The “leverage” gauge shows no real tightening since late 2013 Global PMI Diffusion Indexes

US leadtime data does chronicle an improvement in conditions Pricing & Purchasing Summit / November 2014 US leadtime data does chronicle an improvement in conditions

What does the drop in commodity price mean? Pricing & Purchasing Summit / November 2014 What does the drop in commodity price mean? It reflects the inadequacy of emerging market demand. Repairing balance sheets in the advanced economies has meant slower consumption growth. Emerging market consumption can not fully make this up. The supercycle was triggered by unsustainable consumption growth in the advanced economies combined with a displacement of manufacturing capacity that accelerated with China’s ascension to the WTO. The investment boom that marked the build-out of a manufacturing base in the emerging world was extremely resource intensive – adding to the strain on commodity markets. This migration is not complete, but has progressed to the point where the returns on investment are diminishing, i.e., the investment/export model that has powered emerging market growth for 2 decades is also not sustainable. This can be seen directly in low capacity utilization rates or indirectly in weak measures of total factor productivity growth. It signals a shift in the character of emerging market growth toward consumption – a change that will be less demanding on commodity markets.

Are we moving from a supercycle to an era of abundance? Pricing & Purchasing Summit / November 2014 Are we moving from a supercycle to an era of abundance? The “adjustment” in commodity markets may still have a way to go Real prices still look elevated Demand growth does not look to match the rates of increase seen last decade China’s strong growth was raw material intensive; but slower Chinese growth and the changing character of its growth signals less resource intensive demand growth in the future On the supply-side, investments made during the height of the “supercycle” are now coming in – capacity looks ample in many industries (steel, aluminum, rubber, ship building,…). Policy tightening will also act as a headwind to commodity prices

Real prices also still look elevated Pricing & Purchasing Summit / November 2014 Real prices also still look elevated *Real prices. US PPI for Industrial Commodities less Energy deflated by the chained price index for Gross Domestic Product

Slower Chinese growth signals weaker consumption growth going forward Pricing & Purchasing Summit / November 2014 Slower Chinese growth signals weaker consumption growth going forward Percent change year ago

Policy Interest Rates, percent Pricing & Purchasing Summit / November 2014 More aggressive policy tightening in the U.S. will be supportive of the dollar Policy Interest Rates, percent

Pricing & Purchasing Summit / November 2014 And a stronger dollar will also restrain both investor and physical demand

Pricing & Purchasing Summit / November 2014 Concluding thoughts In a very real sense the supercycle continues to play out. Discussions of the “supercycle” in the last decade never really considered a true cycle where prices could fall as well as move higher. Although the lumpy capital intensive nature of commodity markets promotes price volatility, they are also inherently flexible. Over time they do adjust. The data suggests that we are in a period of adjustment that will carry through the near-term. For supply managers, this prolonged adjustment has benefits – it means the loss in leverage normally associated with a recovery will be slow.

Thank You! Questions?