Will the Oil Price Boom End the Global Sourcing Era?

A recent article in Canada's Globe and Mail suggests it might. Already, I'm seeing evidence that companies are reevaluating whether or not it makes sense to ship containers halfway around the world to save a few margin points (or not as the case may be). In certain cases where production has moved to low cost regions on a permanent basis (e.g. textiles, PCBs, certain finished electronics products) it's unlikely the global sourcing boom will slow. However, for many metals and plastics categories, a number of companies I've spoken to in the past month are seriously re-evaluating their options -- or at least moving to or examining a dual-source strategy. What's the exact reason?

The Globe and Mail hits the nail on the head when the story notes that, "For heavy products, rising shipping costs are eroding the low-wage advantage of China over North America ... If oil prices continue to rise, the soaring cost of global transport will act like a major tariff barrier and lead to a substantial slow down in international trade ... Oil prices now account for about half of total freight costs, and for the past three years, for every $1 increase in world oil, there has been a corresponding one per cent increase in transport costs." With some predicting that oil will reach $150 by the end of summer, transportation costs could rise 50% from earlier this year. And if you add to the fact that regional commodity price inflation and scarcity are adding risk into the global sourcing equation, the writing on the wall becomes even more clear that global sourcing's growth might very well begin to slow in the coming years.

- Jason Busch