Sharp Market Changes to Commodity Prices Take Companies to the Edge

Sharp Market Changes to Commodity Prices Take Companies to the Edge

The case study highlights the regional effects of dropping commodity prices. The sharp drop in metal commodities and oil in 2015 and 2016 makes a case for the featured regions. Companies that operate in the specific market are the first to experience the effects. These negative aspects then ripple through the local economy, affecting other players in different sectors.

In the case study, Aberdeen, Europe’s oil capital, experienced a loss of jobs, a contraction of the company, and a general decline in economic activities. These effects spread widely throughout Scotland and Aberdeen Shire. Other sectors that were affected include hospitality, retail, real estate, service players, and Small and medium-sized enterprises. The 75 per cent drop in oil prices during 2015’s first quarter led to alarmingly low tax receipts. Layoffs were common, and services were cheaper. The magnitude and possible long-term effects of the decline concerned stakeholders and politicians significantly in the United Kingdom and Scotland. The significant drop in the price of oil was attributed to the technological advancements that have made fracking cheaper in the United States (Dawson & Andriopoulos, 2017). The main concern was what could be done to mitigate the effects of the downturn.

The study also compares Aberdeen to Whyalla in Australia. Despite the remarkable differences between the two towns in size, the two cities have encountered similar challenges due to the decline in oil prices. Arium Steelworks in Whyalla cut at least three hundred jobs, reduced operating expenses, and still seeks support from different quarters to ensure operations continue. These effects on Arium Steelworks have affected other players, such as real estate, butchers, fashion, and food service. One of the local companies, Martelco Hire, was liquidated due to high debts. Other businesses, including Arium Steelworks, are faced with potential closure. Regardless, the demand for local steel is expected to increase, which may affect overseas producers negatively. The case study confirms the wide ripple effects that a commodity price change has on the immediate players in the sector and the local economy (Dawson & Andriopoulos, 2017).

Questions and answers

Was there anything that could have (or should have) been done to lessen the impact of this sharp fall in commodity prices?

There is nothing that could have been done to reduce the fall in commodity prices. However, the respective could have reduced the prices of basic commodities that are likely to become unaffordable due to layoffs. Increased access to credit for organizations is also important to safeguard against closure. The creation of policies that create a demand for locally produced raw materials such as steel would have buffered the local economies further as the currency circulates within (International Monetary Fund, 2012).

As an advisor to the government, what responses and actions would you recommend be taken as a consequence of these unforeseen events?

The lowering of interest rates is one necessary action in enabling businesses to borrow from financial institutions and remain afloat. Considering that the cause of the price drops is somewhat permanent, the government ought to create a favourable business environment that ensures entities continue to operate and local economies are not paralyzed. Therefore, the formulation of policies that reduce the ripple effects of the event is important for the economy.

3. Compare and contrast Aberdeen with Whyalla and list the similarities and differences. Once you have completed this, try to think of a strategy for change for re-invigorating the local and regional economies in Scotland and Australia.

Similarities

• Loss of jobs through layoffs
• Possible closure
• Reduced company activities
• Loss of sales/revenue

Differences

Running a business involves numerous costs that exceed the affected products. For instance, the raw materials involve multiple suppliers. This means that the sudden fall in prices of oil, steel, or gas should not paralyze companies completely. To safeguard the companies, the government should create policies that lower the interest rates, which should increase access to credit. This credit should enable the companies to operate on minimal capital. It is also necessary to reduce the cost of other goods or offer subsidies to boost or support continuous production. These steps should enable the companies to utilize the available financial resources, produce goods for sale, generate revenue, and avoid closure. In addition, the two companies will still employ individuals, which supports the local economy.

Identify and explain any lessons that can be learned from our two case examples.

The two examples in the case demonstrate the effects that changes in prices of commodities, more so raw materials, can have on the wider economy. The effects are not only found in the direct sector but also ripple through the local economy. Governments need to take action to secure local businesses from these effects, mitigate the severity, and protect citizens from the consequences. Policies are particularly important in ensuring that actions to facilitate business activities during such times are taken. In addition, shielding citizens from the adverse effects is achievable through the stabilization of prices of various commodities, more particularly, the basic ones.

Critical Aspects/Assessment

Price volatility

The prices of commodities such as oil, gas, minerals, and steel are volatile. The study confirms this through the featured drop that occurred in 2015-2016. This sudden drop resulted from a reduced cost of fracking in the USA. The ability to frack more cheaply due to technological innovations caused the prices of oil to reduce significantly. These prices are not necessarily permanent because they can increase at any time.

Market effects

Once prices have dropped, the amounts charged following production using the said commodities drop significantly. This means that companies acquire the oil cheaply for their manufacturing activities but charge clients less than they did in the past for the finished products. This reduces the revenues significantly, making it difficult to service previous loans and pay for labour. The volume of sales does not necessarily increase because layoffs at companies reduce people’s spending power. As disposable income reduces, the other players in different sectors also experience negative effects as their sales decrease (Böwer, Geis, & Winkler, 2007). The result is a widespread reduction in business volume and revenue.

Policy formulation

The role of the government and other stakeholders features significantly in such a case. While directives may be made and temporary action implemented, the need for formulating policies that buffer the people and businesses from severe effects such as closure exists. The governments, local and federal, should collaborate and make policies that ensure the local economy is safe from the effects of more permanent yet sudden price changes of commodities (Christensen, 2016).

Reflection

This case study highlights the diverse roles that leaders play. The government and stakeholders have a responsibility to ensure that businesses run as they should. These parties are held responsible even when external factors constantly dampen the business environment. The environment of conducting business needs to be dependable to ensure that big and minor corporations can do business profitably. Policies are an important aspect that can be used to regulate the environment. The dynamism in the external business environment demands that governments and other leaders in the business sector constantly review the current policies. Policies that were applicable yesterday may be unfavourable tomorrow (Onifade, Cevik, & Erdogan, 2020). Thus, it is necessary to ensure that all players in various industries can access resources that are important for successful business activities.

References

Böwer, U., Geis, A., & Winkler, A. (2007). Commodity Price fluctuations and their impact on monetary and fiscal policies in Western and Central Africa. European Central Bank.

Christensen, B. V. (2016). Challenges of low commodity prices for Africa. Bank for International Settlements.

Dawson, P., & Andriopoulos, C. (2017). Managing Change, Creativity & Innovation. Sage.

International Monetary Fund. (2012). Commodity Price Swings And Commodity Exporters.

Onifade, S. T., Cevik, S., & Erdogan, S. (2020). An empirical retrospect of the impacts of government expenditures on economic growth: new evidence from the Nigerian economy. Journal of Economic Structures, 9(6).

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W2 Assignment: Complete Case 2.1: Supermarket Changes to Commodity Prices Take Companies to the Edge (Pages 36-38) and address the following directives:

Sharp Market Changes to Commodity Prices Take Companies to the Edge

Carefully READ the entire CASE first, and review the chapter(s) pertaining to the case(s) again. Take time to think critically about all of the aspects of the case(s).
Write a brief Overview/Summary of the case in your own words, describing the nature and background information pertaining to the case. (Minimum 1/2 -1 page)
In your opinion, what were some Critical Aspects of the case that were identified? What were some Critical Aspects that you perceived to be very vital? (Minimum 1 page)
How were you able to make those Assessments of selecting the critical aspects or components for the case author/writer and yourself? (Minimum 1 page)
Identify and list some of the Outcomes, Solutions, and Resolutions you extrapolated from the case. (Minimum 1 page)
Write a Reflection on what you learned from the case pertaining to global leadership. (Minimum 1 page)
Make sure your paper format is outlined with the above: (1) Cover Page Sectional Headings; (2) Overview/Summary; (3) Questions and Answers; (4) Critical Aspects and Assessments; and (5) Reflection page. Submit your case assignment(s) in the dropbox before the due date.