Managing Rising Costs In Global Supply Chains

Recently, the global economy has been witnessing notable deflationary trends, particularly in the commodity sector. Major commodity prices, including oil, gas, coal, and steel, have experienced significant reductions. These declines should translate into lower costs throughout the supply chain.

Lower commodity costs can give retailers and consumer‑goods manufacturers room to restore eroded margins, reduce shelf prices strategically, or invest savings into promotions and customer value. However, the timing of pass‑through is critical — procurement teams, category managers, and merchandisers must coordinate on whether to lock in savings as margin, pass them to consumers, or use them to stimulate assortment.

The landscape is complicated by the ongoing effects of tariffs, trade tensions, and shifting exchange rates. Tariffs and exchange rate swings create uneven impacts across SKUs and geographies. A retailer sourcing finished goods or components through tariffed routes may see input cost increases even as raw commodity indexes decline. Category managers should map source country exposure for top SKUs and prioritize resourcing or hedging for the most tariff-sensitive items.

This article explores the many changing dynamics, the implications for corporate procurement teams, and actionable strategies to navigate this complex environment.

Global cost pressures shift as commodity prices tumble

The prices of essential commodities have been on a downward trajectory, driven by a combination of increased production, reduced demand in certain sectors, and ongoing geopolitical tensions. Several major commodities have seen notable declines:

Energy commodities: After spiking in 2022, prices for oil, liquefied natural gas (LNG), and thermal coal have dropped significantly due to production surpluses and reduced global demand in the face of economic uncertainty.

Metals: Smaller price spikes in 2022 have eased, with indices for steel, copper, lithium, and aluminum now trading below January 2022 levels.

Agricultural commodities: Earlier spikes driven by disruptions to key growing regions and supply chains have subsided, with cotton, wheat, and soybean prices all lower than in January 2022.

Chemical commodities: Prices for ethylene, ammonia, and urea have dropped steeply since early 2022, with major indices down around 50%.

Energy and chemical commodity declines can lower costs for packaging, plastics, and transportation, which in turn can reduce both unit manufacturing cost and logistics spend for retailers and suppliers. But retailers must watch timing mismatches between contract terms and spot prices and update promotional plans accordingly.

Exhibit 1: Major commodity prices have declined substantially since 2022

Source: Oliver Wyman analysis

These commodity price reductions are expected to lower costs for many intermediate and finished goods, offering relief to both businesses and consumers. This trend is reflected in producer price indices (PPI), particularly for the world’s major export market such as China. To be sure, China deflation is fueled by more than lower commodity prices, but they will be a factor.

Exhibit 2: Change in quarterly Chinese producer price index

Source: Oxford Economics

As manufacturers benefit from lower input costs, they may pass savings on to customers, effectively exporting deflation and creating a more competitive marketplace.

The impact of trade barriers and exchange rates on global supply chains

While tariffs increase the price of imports, they can also have unexpected deflationary effects on goods in certain geographies. As tariffs impose additional costs on imports, companies are incentivized to seek alternative sourcing options. This shift can lead to a rerouting of goods destined for tariff-imposing markets to those with fewer or no trade barriers, exerting downward pressure on prices.

For instance, as US tariffs on Chinese goods increase, Chinese companies may look to markets with lower or no tariffs to place existing inventory and maintain production. This realignment can create a more competitive, oversupplied environment, driving down prices for specific categories of goods as suppliers vie for market share in alternative markets. This can be seen in the current dynamics for Chinese electronics and electric vehicles: a sharp reduction in goods headed to the US, alongside a sharp uptick in exports to the UK, EU, and Australia — and corresponding price decreases in those markets.