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Boost your sustainability and avoid price spikes

Avoid commodity price spikes by boosting sustainability performance

Boosting your sustainability performance - by being more thrift with raw materials and utilities – can help you avoid commodity price spikes.

According to the World Bank, the price of oils and metals has declined by between 50 and 70 per cent since 2011. Energy prices, which include oil, natural gas and coal, are due to fall 16.4 percent in 2016, with non-energy commodities, such as metals and minerals, agriculture, and fertilizers, expected to ease 3.7 percent this year.

As a result, everything from agriculture to manufacturing has become relatively less expensive in recent times.

But that hasn’t always been the case. Commodity prices boomed in the early part of this century as a consequence of demand rising faster than supply, prompting concerns about supply security, and that could easily be repeated – in fact, commodity prices are always in flux. For example, in mid-2008, nickel was trading at around US$10,000 per tonne – two years later and it was costing over US$25,000 per tonne. Nickel is widely used to plate other metals owing to its corrosion-resistant properties, but it is also used extensively in the production of stainless steel and rechargeable Nickel-Cadmium batteries, all of which means that swings in the underlying price of Nickel have an impact on a huge range of industrial and consumer products.

The Green Alliance has found that availability and price volatility risk has become the new normal for many of the commodities that we take for granted, and that part of the answer lies in replacing increasingly insecure primary raw materials with secondary materials, parts and products, to become more resource resilient in future.

But using less and avoiding unnecessary waste is a smarter place to start.

It’s the efficiency, stupid

When we think about ‘sustainability’ we tend to frame it in the context of the environment. That’s certainly an important part of it, but it has a deeper and perhaps more immediate meaning.

For example, if you’re a manufacturer and you want to sustain your ability to function, you need to be able to access the right raw materials and components, when you need them and at an affordable price. If you can only obtain sub-standard substitutes, then quality will suffer; if you can’t get them on time, you may be unable to satisfy customer demand leading to a backlog or even cancelled orders; and if you can’t get them at the right price, you may be forced to absorb cost increases if your customers won’t allow you to pass them on. Either way, profit margins will suffer and so will your future growth prospects.

However, if you can redesign your products and processes so that they consume less energy, water and raw materials, you’ll instantly become more environmentally, operationally and – crucially – financially sustainable.

> Want to understand your Sustainability and CSR performance? Measure It.

The Dow Jones Sustainability Indexes (DJSI) defines corporate sustainability as “a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments.”

At the Ohio State University in the United States, the Center for Resilience says “sustainability is often misinterpreted as a goal to which we should collectively aspire. In fact, sustainability is not a reachable end state; rather, it is a fundamental characteristic of a dynamic, evolving system. Long-term sustainability will result not from movement along a smooth trajectory, but rather from continuous adaptation to changing conditions.”

With that in mind, you need to ensure that sustainability thinking is embedded in all your business practices, including procurement, and that you remain vigilant to change and circumstance.

The benefits of being thrift and how to obtain them

By cutting consumption and avoiding unnecessary waste, you’ll access a number of benefits.

In this context, your business will be much more resilient to price shocks associated with material or energy shortages – meaning you can carry on doing what you do best, when your less sustainable competitors may falter.

Day-to-day, you’ll save money. Efficiency savings are one of the best ways to improve your profits so that you can then invest in future growth, with every £1 saved going straight to the bottom line in a way that’s hard to achieve in other ways. For example, let’s say you work to a 5% net profit margin and you’re able to save £20 a month on electricity costs by being more thrift in your use of energy, that’s £240 a year in extra profit. To achieve the same benefit, you’d have to generate an additional £4,800 of turnover at 5% net profit margin – what sounds easier, selling more or saving energy?

To get started, it’s necessary to understand your current approach and to review your sustainability and CSR performance, implementing strategies, policies and procedures that embed sustainability right across the organisation.

One such strategy should be to evaluate the areas of your business that are exposed to sudden price volatility (energy, key raw materials etc) and to develop an action plan for avoiding and then mitigating against price shocks and the unavailability of key commodities. To underpin this, you could adopt a policy of holding a certain amount of contingency raw material stocks (if you don’t already) and providing on-site back-up power in case of outages. Procedurally, you may want to think about how you communicate your plans to strategic customers so that they know you have a plan in place to deal with any hiccups.

The bottom line is this: sustainability is about living within our means now, so that we can continue to prosper in the future. That applies just as much to your business as it does to society at large.

Do you agree? What steps have you taken to evaluate and then avoid the risk of commodity price spikes by embracing sustainability approaches? We’d love to hear from you, share your thoughts in the comments. And thanks for reading!

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