The Decisive | Season 6 | Ep.11 - Uneven Demand, Tight Supply: Navigating the Next Procurement Challenge

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Kristen Hallam:

You're listening to the Decisive Podcast: Insights and analysis to empower confident decision making. Hello and welcome to the Decisive. I'm Kristen Hallam, your usual host. Today's episode is adapted from a June 11 client webinar titled Persistent Disruption, Uneven Demand: What Procurement Teams Need to Navigate Next. The discussion brings together the following experts from S & P Global Market Intelligence: Emily Crowley, who discusses the macroeconomic and procurement outlook; Gregory Muller on energy markets; and Maxwell Clarke on the impact of AI and data center expansion on capital equipment. Our experts look at how disruption in the Middle East is moving beyond energy markets and into broader supply chains affecting shipping, chemicals, metals and industrial inputs. They also examine why software demand does not necessarily mean meaningful price relief, especially as AI investment and data center buildouts continue to crowd out capacity in equipment markets. You'll hear why oil prices may stay higher for longer, why LNG risk looks different from the 2022 energy crisis, and how data center demand is extending lead times for transformers and electrical equipment.

For procurement teams and corporate strategists alike, the message is clear: This is a volatile environment where availability, risk mitigation and active contract management matter as much as headline price moves. Let's get into the conversation now.

 

Emily Crowley:

The title of today's presentation is Persistent Disruption, Uneven Demand: What Procurement Teams Need to Navigate Next, and it certainly has been a tumultuous past three months. With that I'll jump into our macroeconomic outlook. What I've pulled here is our MPI [Material Price Index]. So this is our basket of material prices used by heavy manufacturing. So this is going to include everything from raw materials like your nonferrous metals, steel, transportation costs, drams, et cetera, et cetera. So it's a very broad-based measure of industrial inputs and it tracks costs. So it's an index that's based in 2002. And what I've done here is I've compared this based in comparison of our Q1 forecast.

So we've seen this significant upgrade. Initially in our April forecast we had a bit of a spike retreat scenario with the expectation that the crisis in the Middle East would be short lived and we would be seeing a reopening of the strait of Hormuz relatively quickly. And the key change here that Greg will be talking a little bit about more is that's no longer the case and we're expecting to see a prolonged closure or effective closure. One thing I'll highlight here is that this is actually the MPI excluding energy. So one of the features of the crisis in the Middle East essentially is that these pressures are not just impacting energy they're filtering downstream and they're starting to touch our cost outlook for many different materials and we expect that to continue. So what are the key themes of the 2026 Q2 forecast? As I've mentioned, we're no longer expecting this to be a short-lived scenario. In fact, we've lived through that short-lived timeframe. We're not expecting any quick fixes.

And essentially we see the strait of Hormuz remaining effectively closed, hopefully starting to open up over the summer. There's multiple knock-on impacts of this. Essentially as the Strait of Hormuz remains effectively closed, more countries are running through their inventories, which means we're setting up for and getting closer to a pivotal point where we could actually see significantly worse economic outcomes. The longer the crisis continues, additionally the more pressure we're seeing build in supply chain. So shipping has been disrupted. We've seen disruptions on midstream, downstream goods, capacity has been offline. A lot of this is emanating from Asia, but that is really starting to push the secondary impacts through from a cost perspective. So the initial cost jump very much driven by energy inputs. Now we're starting to see what that means as those price shocks are moving through the supply chain from raw materials to intermediate and finished goods.

Shortages have reemerged. So risk mitigation strategies in sourcing are really marking a departure from the global marketplace. Right? We're no longer prioritizing low cost, best cost. We're looking at mitigating risk. So that's a theme we expect to continue and we can certainly see that. And that's also been spurred on by some of the volatility we've had in trade policy as well. And then essentially what that means is that the procurement environment is effectively constrained. We don't necessarily have the supply base that's as abundant, which essentially is leading to some effective tightening of capacity.

On the other side of that, we do see demand fundamentals starting to slow. GDP growth is slowing across most regions. We are expecting central banks to balance monetary policy against the inflation impact of the war. We've seen that today with the ECB initiating an interest rate increase as well. That said, even though we have these slowdowns, defense and AI remain major growth engines. So when we look at the total outlook, there's still a lot of positive and inflationary pressure outside of the war in the Middle East, which we don't expect to slow down.

And then the final point is that uncertainty remains elevated. The outlook very much hinges on the length of the conflict. A lasting ceasefire requires agreement by multiple parties. It's got to be the US, Israel and Iran. And it seems despite what we've been hearing, that has been slow to evolve or solidify. And then also the last piece of risk is that tariffs are still a moving target. So we've had a number of announcements coming out of February overturning IEEPA, section 122 put in place. Now we're starting to see the kind of the end game of implementing section 301 tariffs. So just to give a kind of high-level view of what the demand impact has been, the oil price shock leads to higher inflation and lower growth across all regions. When we look at GDP growth rates, it looks a little bit mixed. What part of that is just based on what countries are implementing policies to defray some of the impacts of the war in the Middle East.

Additionally, some of the growth expectations closing out 2025 came in a little bit stronger. But the big takeaway here is that global growth has been downgraded to just above 2% growth in 2026, where we were just below 3% in February. And that's really widespread and certainly seeing that in North America, Western Europe as well. So what does this mean for supply chains and what are we seeing when we think about commodities’ prices and procurement? So essentially we are over the first wave of panic buying and now we're settling into the facts, the reality that this is going to be a longer-lived conflict. Essentially coming out of February, the initial impact and when we looked at the manufacturing PMIs was that they actually showed a pretty significant resilience. Manufacturing PMIs broadly accelerated and services dropped. So what was that? Essentially it was industries and companies scrambling to get their orders in and build stocks. So I think one key piece is that a lot of that purchasing went into inventories and did not go into demand or consumption.

So suppliers’ delivery times have deteriorated and they've actually deteriorated very quickly coming into April and May. So not quite at the crisis levels that we had during the pandemic, but this is an indicator that we're starting to see strain and delivery times and things are taking longer to appear. And then finally we're seeing this come through in the data. We had an inflation or a PPI print today, we had an inflation print in the US yesterday. We are definitely starting to see those numbers jump up as expected that we already started seeing that in March, but those input prices have moved significantly higher and output prices are falling. What's interesting on the PMI when we look at this is it looks like the output prices may be peaking and moving sideways. Not necessarily unprecedented given the relationship between these two indexes, but does suggest that we might start seeing that demand softening limit the ability of some firms to pass along costs.

So chemicals has been one of the kind of the grounds area in the canary in the coal mine of what's been happening. So I wanted to pull that out as an example of kind of what has been happening and what can we expect. Essentially, global chemical prices surged since March following the effective closure of the Strait of Hormuz for two reasons. One, the Middle East is a major manufacturer of chemicals. So we had that direct impact to supply, but also we saw that lift to feed stock costs given the exposure to energy markets. This hit Asian producers hardest outside of mainland China. But even mainland China has been impacted as well. And essentially what we've seen is that exports have been reorienting to fill the gap, again dragging global prices higher. So no longer sourcing from Middle East. We're going to try to get those chemicals and feed stocks elsewhere. Or are we looking primarily in North America?

We've seen that create issues around the Panama Canal. We're starting to see more congestion there. Auction rates have increased significantly. And again, that's just the congestion that we expect as part of the supply chain disruption. What we've seen since the April peaks is that this, the initial panic buying has started to subside and we've seen some of these spot prices move back down. And again, what's really driving this is a lot of those purchases went directly into inventories, not consumption. As those inventories rebuild, the spot market is stabilizing and some of that pressure is coming off. So make sure that especially in these times of volatility, we're not just latching on to the peak prices because conditions are starting to show improvements.

And then just looking at the bifurcated market that we're seeing as far as the demand environment, two things I want to highlight is number one, we are starting to see this weakness hit on the consumer sentiment side, which is incredibly important. Consumers are not feeling confident about the economy, which does indicate potentially a pullback in spending. On the other hand, on the other side, this is very much a US story, but the supply chain is global, is the surge in AI related investment. So if we look at global GDP growth, excluding kind of the information processing equipment and software, which is where we're seeing most of the AI activity get picked up. That’s up about, compared to 2022, if we look at that information processing equipment and software, it's up almost 45%. So this is a significant driver of growth. It's not just going to be limited to the computer equipment that goes into data centers, but also on the infrastructure. And Max will talk about how some of this AI investment is starting to crowd out some traditional demand sectors as well.

So for some of the key takeaways, again, the oil shock is really driving inflation across regions. The Middle East conflict and the Strait of Hormuz disruption has pushed Brent [oil] into close to triple digits and has lifted inflation and lowered GDP globally. Demand fundamentals are weakening before the supply shock fully transmits. That said, essentially given the nature of de-risking, we don't expect to see a massive like demand weakening. We can leverage that to lower prices just because we are seeing a premium being put on risk mitigation rather than low price and locking in lower prices. So there's not as much flexibility as and supply chains are tightening essentially to keep those prices elevated or at least neutral rather than being able to capture any sort of cost savings, at least until we see some improvements of traffic through the state of Hormuz.

So with that I'm going to go ahead and pass it on to Greg to cover the energy in more depth.

 

Greg Muller:

Thanks so much, Emily. Let's jump right in. Key takeaways here. Oil prices are going to remain higher for longer and not quite the same peak that we had previously forecast. Prices remaining above $100 a barrel until end of 2028. Global LNG prices. So Europe and Asia prices are high, but it's not a repeat of 2022. The pricing gains are strong and will come to these kind of high prices will continue into the third and fourth quarter, but not to the same levels that we saw during 2022.

US natural gas prices don't see much effect from the war in the Middle East. In fact, there are some downward pressures on U.S. natural gas prices as a result of higher oil, meaning higher associated natural gas production. And really what's happening here is you have minimal traffic passing strait of Hormuz, which means global oil supplies decline by around 15 million barrels per day relative to what they would be without the situation. This has resulted in inventories dropping by mid-May around 425 million barrels. And really it's becoming a race against inventories. So as inventories decline initially at 5.5 million barrels a day, it becomes a race against the kind of the clock between when you can get a deal passed. This forecast assumes a deal that means that you have a gradual reopening from the beginning of August.

But really, as things go on, inventories start to near minimum operating levels. So if the status quo remains as is for the next two to three months, you don't see any progress towards a deal. It starts to get to the point where pricing can get a lot worse, where you start to go well above $100 a barrel. Once it does happen though, there are still—the risk still remains. The expectation is that, well, you have a deal, prices come down, but that's not the reality. The shipping needs to reshuffle. You need to get the ships from wherever they are in the world back to the Gulf. They then need to load, then they need to go to their destinations.

That's a minimum of two months. And it means that even when you have a deal made, there are going to be lasting consequences. And that's why prices remain high even through 2027. But we have to remember that LNG also passes through the strait of Hormuz? Why are natural gas prices not spiking to 2022 levels? Because that is not what our forecast is. The reason is a couple of things. Firstly, LNG represents about 7 to 8% of global natural gas. So that means that it's just not quite the same level of disruption as you had in the crisis with the Russian invasion of Ukraine and the subsequent stopping of gas to Europe. The second thing is that Europe has better measures in place to ensure storage full by winter and enforce that there isn't the kind of rush buying that there previously was. And thirdly, you just don't have the same level of natural gas supply tightness that you did going into 2022.

And then the last thing is that global LNG supplies had already been improving at the beginning of this year. There was a lot of additional capacity coming online from the US and so that is mitigating a lot of the pricing gains that you would have otherwise seen. In fact, there's a degree to which elevated oil prices mean more oil production and so more associated gas production. And that is marginally downward pressure on U.S. natural gas prices. So U.S. natural gas—and the last thing is just that production has remained robust even at relatively moderate pricing gains. And so that all means that prices have a lot of downward pressure on them.

So looking at chemicals prices, we have global ethylene and propylene prices here. What you can see is you have a reversion from the fourth quarter in most of the global markets. What's happening here is obviously a—partially a feedstock question. So oil prices are decreasing, so you expect the chemicals prices to decrease as well. But it's also an inventories question. So as Emily was talking about, you had that rush to buy in March which sent prices spiking. But now as things start to renormalize, it means that you don't have the same. It means that there is an easing of prices over the next couple of months.

And with the US it’s a little bit of a niche case where it's because it's more driven by Henry Hub prices. You get a return to growth as the slight growth from the Henry Hub intersect with the prices from the global markets coming down.

What are the risk factors? What are we thinking about? I mean obviously the war in the Middle East is on everyone's mind. For once, OPEC isn't in the driver's seat. Basically even if they increase production, they can't really get it out to global supplies. And so there isn't much in terms of that. But yes, that's what I have. I will pass it on.

 

Maxwell Clarke:

In general, as AI and data center expansion becomes a very much bigger part of everyday life and discussion, you have to start to sit back and think. A lot has been said about what AI is going to do for our lives and the economy in general for the future. But most of those exercises, like, understate the degree to which it's impacting our present. That being said, Emily alluded to it earlier. There are a lot of ripple effects. There are a lot of questions that we can ask ourselves about what the status of demand is in the, across the economy, none of which really in general seems to be very strong. Right? But what data centers and the first mover advantage that's essentially driving high tech or tech companies that are building them is the first mover advantage and the need to essentially procure, obtain equipment as quickly as they can and almost essentially at whatever price.

It's affecting a lot of things. It's affecting, it's starting to affect things like labor, the need for specialized labor, pulling electricians away, similar to what we saw during fracking, the fracking boom, where you wind up having people moving to different parts of the country for better, higher paying jobs. But at the end of the day, those labor rates also wind up being seen across the economy because they are essentially now the new going rate for that particular role. In this case, the greater focus would be on specialized skilled labor like electricians and engineers, for example. Materials in general, we're still dealing with a lot of transformative issues, right? We're still dealing with the most recent fly in the ointment being the eruption of war in the Middle East. This time last year, we were knee deep in discussions of what are tariffs going to be doing to the economy, what are the tariffs even going to look like. Trying to unbox all of those things and unpack all of those things, none of it is particularly clear, or none of it was particularly clear along the way. And some of that continues to be true today. At the end of the day though, what we do know about what goes into data centers is the onerous and significant demand for things like electrical equipment power sourcing especially too, as we look at what are the requirements, right?

At one point, data centers historically have had power generation backups. Now as they become a little bit more of a political third rail, they're now becoming increasingly responsible for securing their own power sources. So, so that's leading to increased demands for things like turbines. Even more so than just from a backup standpoint. You also see the onerous demands from AI chips in themselves, in the infrastructure and architecture for these sorts of data centers requiring significant cooling demands. Where the rubber meets the road is an interesting thing, right? Because within that HVAC and cooling requirement, you also see significant increased demand in things like pipes, valves, pumps, everything that essentially winds up making that system work. But in general, the whole backdrop and the problem in all of this remains capacity constraints. Historically, the big capacity constraint for electrical equipment has been underinvestment, underinvestment in the grid.

And then starting in around like 2020 through the present, we've had a big pivot and an increased amount of demand or increased sources of demand, whether it be looking at electric vehicles, looking at grid modernization, just in general electrification. And none of it's easy. You can't just instantly turn on capacity. And so really more than anything, we are dealing with a significant level of capacity constraint that over the next couple of years could potentially get better. The build out of data centers to this point, especially as the earliest big stages of investment have come in, have benefited from a weak construction environment throughout, especially throughout 2025, just looking at that in particular. The weakness that we've seen obviously in residential construction, that's been going on for quite some time, obviously all of this is sponsored by a higher interest rate environment. But also nonresidential construction essentially has just created an environment where the one form of nonresidential construction that's really taking hold here in data centers has essentially almost carte blanche rights to get everything it needs, hopefully as quickly as it can get it. Obviously, tech companies don't generally like to hear the word no or extended lead times or anything like that.

But you know, they are operating in an environment where extended lead times already existed. However, they're just making them worse. In many categories like transformers and switchgear, you've seen already long lead times double. High voltage equipment, you're looking at lead times of over some, in many instances over a year. Advanced components in general are well over a year and not even focusing on that, but just in general the demand for normal things like pipes, valves, pumps, compressors, et cetera. You're increasingly seeing what would have been in this environment adequately supplied to increasingly becoming thin. Like I said before, all of this is driven by the first mover advantage, similar to what you would often see in the past of being the effects of like defense spending, where you know an entity, in that case the government is moving in, not even really particularly worried about cost and then just essentially buying everything they can for a specific purpose. You're seeing that with tech companies as well. And more than anything it's sponsored, aside from tariffs obviously and things like that, a significant chunk of the increase that we saw in 2025 and into 2026.

The stated capacity. There are stated capacity or stated capacity increases that we're seeing from a lot of companies. But again, none of this is just like turning on a light switch. Right? It's a very slow-moving process. And more than anything, it's not just the emergence of demand, but it's the evolution of demand. Before, as you're able to like increase plant production, expand plant production, increase and open a new plant where a turbine manufacturer would suddenly be able to solve or adequately supply turbines at a rate that they previously inadequately supplied turbines before. And that's essentially what we're witnessing. Again, like I said earlier, the story that we've been talking about in terms of the bottlenecking in electrification came from things like electrical equipment, transformers, motors, generators, switchgear. But in the case of data centers, it's really just expanded considerably. Generally speaking, extended lead times, they are the binding constraint for the development of these things.

They're enormous. Right? And that first mover advantage means that these companies are going to do everything they can, aside, obviously, in addition to insourcing or sourcing themselves the things that they need, they're going to pay for whatever they need to out in the market and that's going to affect everyone else who isn't involved in purchasing and things like that for high tech. The other part of it that's obviously cooling equipment. None of this is particularly easy, obviously, as another fly in the ointment being the emergence of war. What we've seen though more than anything is the significant emergence in supply chain volatility. Here we have, as measured by PMI, our PMI group, the return of supply chain volatility levels not seen since the second half of 2022. Part of that is obviously the eruption of war, very clearly, right?

It's not just perfect timing, but more than anything, it's not something that just is necessarily going to go away because this support, this demand itself isn't going to be going away. And so more than anything, none of this becomes cheaper for anyone else non high tech that needs them. In general, though too, for power equipment, we continue to see significant improvement or significant gains in orders. Orders and shipments continue to surge even in what would otherwise be considered a weak environment. All of this is driven and supported by data center expansion. Similarly, also as well for cooling equipment. In the context of pricing, which is what we're here for, right? A lot of this seems dwarfed by obviously what we saw in 2021, 2022 and coming out of 2023.

But in and of itself it's a little bit misleading because in reality, aside from tariff support, when you're looking at like construction demand and construction activity, these prices should be a lot weaker. Don't be mistaken by any of this. The fact that you're seeing 5% gains for power equipment, similar gains for electrical equipment and HVAC, doesn't really jive with what you're seeing for nonresidential construction, and certainly not for residential construction. Obviously, it's not apples to apples in terms of what goes into building a house versus what goes into building a data center the size of Manhattan. But all the parts are there, all the ingredients are there to bake the cake. And the reality comes down to where's the support, where's the relief? And the reality is, until increased capacity comes into play, you're not going to see significant relief. And the truth is, more than anything, even as cost pressures begin to alleviate, potentially as oil prices come down, post war, post resolution and all of this, there's no real onus on suppliers to actually cut prices as long as demand from, for example, from this particular portion of nonresidential construction continues to support buying everything that they can make. The real key, more than anything, is a focus on availability with extended lead times for data centers in general, you also have to focus on extended lead times for things that you'd be procuring as well.

Price is less of a significant factor. And the reality is you're always going to probably wind up paying more tomorrow. And so more than anything, trying to build up your own inventories is probably the best plan you could really have in terms of navigating future costs and future prices. But like I said before, this is very much a managed crisis. Essentially, that's the best probable way to think about it. It's not quite at the level of the emergence of war, but it should be thought of in many respects the way that we have historically thought about things like defense spending and the crowding out effect. Because at the end of the day, with these companies moving with the mentality of a first mover advantage, even though they're not making money in the present, their eye is on profits in the future. And that's a really difficult thing to fight, especially when we talk about capital levels that they're operating with.

And with that, I'm going to hand it back.

 

Kristen Hallam:

Thank you for listening to the Decisive podcast from S & P Global. Please subscribe and join us for next week's episode. Until then, stay cured, curious, and stay informed.