Low profitability has undermined commodity producers and brings high risks to the supply chain, according to analysis by IHS.

The IHS Materials Price Index, a weighted average of 10 major commodities, fell 40% during 2015, below the lows reached during the Great Recession.

Low oil costs have fed into commodity-grade polymer, bringing down prices for these products. Image source: Pixabay.“The risk to the supply base for long-term commodities is rising rapidly,” says Jason Kaplan, senior research manager at the IHS Pricing & Purchasing Service. “Low prices have clearly undercut the margins of commodity producers, with many operating at losses."

Weak demand and overcapacity have deflated prices in many industries, and supply has failed to react quickly to the drop-off in price, Kaplan says.

“If we look at the nickel industry, 70% of producers are losing money, but no one wants to blink first,” Kaplan says. “We are witnessing a replay of the year 2000 with the U.S. steel market. The same situation led to 21 companies going out of business [in] 18 months."

According to Kaplan, producers are reacting to this climate by cutting capital and operating expenditures and jobs. "How the supply base fully adjusts to the low pricing is still unclear, but the implications for long-term, stable commodity supply are looking increasingly negative,” he says.

Base metals have been depressed by both weak fundamentals and lack of financial interest. While demand for many commodities has weakened, high capital investments means mines have kept running. “Most base metal prices will stay low, as long as no structural change cuts supply,” Kaplan says.

Low oil costs have fed through into commodity-grade polymer, bringing down prices for these downstream products, Kaplan says.