Top 10 Risks

4. Commodity Price Risk/Scarcity of Materials

Rankings in Previous Surveys

Rankings by Region

The global commodity market has been suffering from wild mood swings.

In the early days of the COVID-19 pandemic, when entire industries came to an abrupt halt, oil futures crashed. Brent Crude, the global oil benchmark, briefly plunged below $20 a barrel in April 2020 as coronavirus lockdowns reduced demand from airlines, motorists and manufacturers. This represented a sharp drop from the 2019 average of $61 per barrel. Metal prices also fell in early 2020. The biggest declines were in copper and zinc.

Meanwhile, border closings, as well as port and factory shutdowns, disrupted global supply chains, leading to severe scarcity of materials. Empty supermarket shelves became a signature image during the early days of the pandemic. Shortages of medical masks, gloves, face shields, sanitizing products and ventilators were reported in most countries. With more people working from home, the semiconductor industry experienced an explosion in demand for products like smartphones and computers, causing an unprecedented supply shock.

Now that the worst of the pandemic is winding down, the global economy is struggling to keep up as demand rebounds with a vengeance. Companies are unable to secure enough raw materials to make products that are suddenly in high demand. Material shortages have swung the commodity market to the other extreme. According to a CNN report, Brent Crude has shot up to over $70 a barrel for the first time in nearly three years.

A similar phenomenon is playing out across a host of commodities. At time of writing, iron ore, copper, steel, corn, soybeans, sugar and sunflower oil have hit record price levels. The Bloomberg Commodity Spot Index, which tracks price changes across a range of metals and agricultural commodities, has jumped roughly 60 percent over the same period in 2020. Governments’ quantitative easing and fiscal stimulus measures in the world’s major economies are also keeping these prices elevated.

At the same time, cyber attacks, extreme weather conditions and economic uncertainties are all contributing factors to increased commodity volatilities, causing major concerns for businesses.

In Aon's 2021 Global Risk Management Survey, the risk of commodity price risk/scarcity of materials has registered its highest-ever ranking (number four) since it was added to Aon’s Risk List in 2009. The global financial crisis in 2008 drove the commodity price risk to a similarly high ranking (number five).

While preparedness for this risk has improved, loss of income in the past 12 months has almost doubled from 28 percent in the 2019 survey to 50 percent in 2021.

As expected, the food, agribusiness and beverage industries perceive commodity price risk as a top threat. According to the U.S. Bureau of Labor Statistics, wholesale food prices have gone up at least 1 percent every month since January 2021, a trend not seen since 1973. The prices of cooking oils, a so-called disposable ingredient, have nearly doubled since earlier this year.

Meanwhile, the industrials and manufacturing sectors also rated commodity prices as a number one risk. The Institute for Supply Management (ISM), based in Washington, D.C., said that "record-long lead times due to port closings, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments" of manufacturing. For example, since chips have become an essential component in so many products, their shortages not only affected electronics and automobile manufacturers but also firms selling medical devices, chemicals, apparel and even tobacco. CNBC reports that at least 70 Standard & Poor’s (S&P) 500 companies highlighted chip shortages during their 2021 second-quarter earnings calls.

There's no telling how long demand will outpace supply. The big question is whether shortages and price hikes are temporary by-products of the pandemic, as some experts claim, or if the global economy is changing in ways that could permanently hike the cost of doing business and usher in a new era of inflation. Hanna Ziady with CNN Business points out that the commodity price risk has huge implications for investors, companies and governments.

According to experts at Tracc Solutions, business leaders need to formulate a two-pronged strategy to mitigate the risk of commodity price volatility and escalation by first incorporating detailed cost tracking, projections under various scenarios and risk analytics. Procurement departments need to become agile and adept within the full gambit of derivative instruments to facilitate the widest possible hedging opportunities. At the same time, companies should focus on the proximity to raw-material sources and their value-to-sustainability quotient.

Given the pressures on commodity pricing, building broader resilience and agility is a partial mitigant to this external threat. Understanding and integrating various risk management solutions is key to navigating new forms of volatility and solving emerging and long-tail risks.