For any business that trades raw materials in the fuel, metal, or agricultural sectors somewhere along their supply chain – a large proportion of UK businesses – unpredictable commodity prices can make financial planning feel like guesswork. Sudden swings in costs can directly erode profit margins, wreak havoc with budgets, and make long-term forecasting near-on impossible.

The real issue? We’re not talking about major economic events such as the 2008 crash that are few and far between; markets can be impacted by a wide variety of events that are happening more and more. Increased summer temperatures? A change in farming policy? New trade routes working around political conflict? These things, though out of your control, could impact the prices you’re paying for materials.

So, what are some of the global factors that might impact your bottom line?

How does supply and demand impact market prices?

We all know the basics: the most fundamental principle governing commodity prices is supply and demand. When supply outstrips demand, prices tend to fall, and when demand is higher than supply, prices rise.

But what does this look like in real life, and why does this happen? We can look to the oil market over the past few months as a prime example.

According to the Financial Times, oil prices recently tumbled to a five-month low on the news of a ‘large surplus’. This was driven by a combination of factors: increased production from OPEC+ nations and U.S. shale producers, coupled with fears of reduced demand stemming from the U.S.-China trade tensions.

This created a classic oversupply scenario, pushing prices down. The markets, reactive in their very nature, can swing just because of the perception of a future surplus or deficit, bringing a significant and immediate impact on prices. In this scenario, revenues of producers will have been impacted, whilst the operational costs of heavy fuel consumers will have been lowered, creating significant forecast variances for both, for better or worse. If your CFO is having to grapple with even the perception of supply and demand changes, budgeting quickly becomes a losing battle.

When to look at the wider global economy

The overall health of the global economy is a major driver of commodity prices. During periods of economic growth, industrial activity and consumer spending increase, pushing up demand and prices for everything from copper to crude oil. In a recession, the opposite occurs, potentially slashing demand for products and services.

Currency fluctuations can also alter your business’ risk profile. Since most commodities are priced in U.S. dollars, any business operating primarily in another currency (like euros or GBP) will see changes in raw material costs as the dollar strengthens or weakens.

This is a risk that many businesses forget about. Yet, it’s true – the economic health of another country can impact your operations in the UK. It may seem unreasonable, but it’s just another factor that impacts the price of commodities.

How can political changes impact my business?

Geopolitical events are often the most sudden and unpredictable drivers of commodity price shocks. Tariffs, sanctions, regional conflict and export bans can instantly disrupt supply chains, block access to markets and cause prices to either spike or plummet overnight, with absolutely no warning.

This instability is unavoidable, and it’s just the nature of trading in raw materials. Whilst it’s always a threat, these events are particularly challenging to mitigate against through planning; if this kind of risk kept CFOs up at night, they’d never sleep. However, it does put a question mark over all future financial planning, no matter the size of your business.

How is new technology impacting supply and demand?

Finally, technological change is a double edged sword that creates both opportunities and risk. Supply, for example, can be dramatically increased by new extraction techniques, such as fracking in the oil industry, that lower input costs.

However, emerging technologies also create entirely new demand streams. Need more data centres? Materials for EVs? The metals industry must react to unprecedented surges in demand, and therefore price, of materials such as lithium, cobalt, and nickel.

Knowing how and when to manage your commodity risk

What’s clear is that with all these factors at play, the one thing you can be certain of is uncertainty over the next few years. Understanding the markets and how they work, or simply reacting to price changes after they happen, is one thing, but protecting your business from this volatility before it happens will hugely reduce your business’ exposure to risk.

A successful risk management plan? Savvy businesses will shift from a reactive to a proactive stance, implementing a strategic hedging programme and protecting your budgets from price volatility. Want to know how hedging can help your CFO sleep at night? Head to our Explore Zone to see how hedging can impact your own business, no strings attached.