As companies prepare 2027 budgets, commodity and currency assumptions are going to be particularly difficult. Steel, copper, oil, petrochemicals and resins are being influenced by very different forces, while tariffs, geopolitical events, interest rates and economic policy are increasingly causing regional markets to move independently of one another. The challenge is not simply deciding what price to put in the budget. It is deciding how much exposure the company is willing to leave open if that assumption proves wrong.
U.S. steel is a good example. Tariffs and reduced imports have supported domestic pricing and created a much different market than exists in many parts of Asia and Europe. Copper has shown similar regional divergence, with U.S. pricing at times separating materially from global benchmarks as tariffs and trade policy have changed where metal flows. For sourcing organizations, that separation creates both risk and opportunity. A supply strategy that was competitive when North American, European and Asian markets moved reasonably closely together may look very different when one region develops a significant premium. Companies need to understand not only their current suppliers, but where alternative capacity exists and how quickly they could move business if the economics change.
That may mean qualifying suppliers in multiple regions, keeping customer approvals current, maintaining alternative tooling or specifications, or simply doing enough work in advance that shifting 20% or 30% of volume does not require starting a six-month sourcing project from scratch. In this environment, resilience is not just having a second supplier. It is having the ability to move to a different supply market when the economics change.
Energy and petrochemicals present a different problem. Disruption in the Middle East can affect oil, feedstocks, freight and chemical supply at the same time that weak demand and excess capacity are putting downward pressure on portions of the resin market. The result is not simply that prices are going up. Some products and regions may see sharp increases while others remain under pressure.
Currency adds another layer. Exchange rates can move enough to materially change the economics of an international sourcing decision, particularly when interest-rate expectations and broader fiscal, trade and economic policy are shifting. A supplier that looks 8% less expensive in euros, yen or pesos today may not still have that advantage if the currency moves materially before the savings are realized.
All of this makes commodity and currency management an important part of budgeting, but also an important part of the sourcing strategy itself.
Match Risk Management to The Customer Commitment
The starting point should be understanding what has been promised to the customer. If a manufacturer gives a customer a firm one-year selling price while leaving a major raw material completely floating, it has effectively chosen to speculate on that commodity with its gross margin. If the customer needs a firm one-year price, fixing or hedging an appropriate amount of the underlying exposure may make sense. If the customer’s price adjusts quarterly based on a trailing three-month commodity index, the purchasing strategy should ideally work the same way. The index, averaging period, timing and duration should match as closely as practical. The same principle applies to currency. A company quoting a fixed U.S. dollar price for a product sourced in euros has taken on EUR/USD risk unless it has a mechanism to pass that movement through or hedge it.
An important point is that hedging does not necessarily mean buying futures or calling a bank. There are several different ways to reduce exposure, and the best answer often involves a combination of them. One of the simplest is to have the supplier take the risk. A company may negotiate a fixed price for six or twelve months, establish a formula tied to an agreed commodity index, or lock a portion of expected volume at a known price. The supplier may hedge the exposure itself, incorporate some risk premium into the price, or simply be in a better position to manage the underlying commodity. From the buyer’s perspective, the result can still be a useful hedge.
Companies can also use financial hedges, including futures, swaps and options. Futures and swaps can effectively fix the price of an exposure for a defined period. Options can be particularly useful when a company wants protection against a large increase but still wants the ability to remain market competitive if the commodity declines. A manufacturer worried about copper moving higher can, for example, use options to establish an effective ceiling. If copper rises sharply, the hedge provides protection. If copper falls, the company can continue buying at the lower market price, less the cost of the option. That structure can be especially useful when customers expect suppliers to absorb increases but also expect them to remain competitive when the market comes down.
There are also natural hedges, which are often overlooked. A company buying materials in euros and selling products in euros may have less currency exposure than one buying in euros and selling entirely in dollars. A manufacturer with both purchases and sales tied to the same steel or resin index may naturally offset a significant portion of its commodity risk. Producing closer to the market where the product is sold can sometimes create a natural currency hedge as well. Natural hedges are attractive because they often do not require a separate financial instrument. The exposure is reduced through the structure of the business itself.
In practice, the best solution may use several approaches at once. A company might have a supplier lock a portion of volume, use options for another portion, leave some demand floating because it has customer pass-through, and rely on a natural currency hedge for international sales. The objective is not to eliminate every bit of volatility. It is to understand which risks the company is actually being paid to take and avoid taking the ones that add no value.
Make Commodity Management Part of The Savings Plan
This becomes especially important when companies are launching significant sourcing cost-reduction projects. Suppose a company qualifies a new supplier that provides a 10% structural reduction in cost, but copper increases 15% while the transition is being completed. Or it moves production to a lower-cost country, only to have currency move against it before full volumes are transitioned. The sourcing strategy may have been successful, yet very little of the expected savings may show up in the P&L. Too often, the sourcing savings and the commodity movement are blended together. Management sees that the part still costs roughly the same and concludes that the project did not deliver.
A better approach is to establish the commodity and currency baseline when the project begins, separately measure the structural savings created by sourcing, and determine how the commodity or currency exposure will be managed during implementation. That may mean asking the incumbent or new supplier to hold pricing during the transition, locking a portion of the commodity financially, using options to protect against an adverse move, matching the customer and supplier index structures, or using a currency hedge when moving production internationally.
This is particularly important on projects with long implementation periods. A sourcing team may spend six or twelve months identifying suppliers, qualifying parts and transitioning production. Leaving the underlying commodity or currency exposure unmanaged during that period can allow a market move to consume much of the value before the project is fully implemented.
For 2027 budgeting, companies will still need a view on where steel, copper, resin, oil and currencies are headed. But the more important work may be understanding which exposures are open, which are naturally offset, which can be passed through, which should be fixed or hedged, and how quickly the supply base can adapt when regional economics change. Accurately predicting all of these markets is unlikely. Building a sourcing, commercial and hedging strategy that can perform reasonably well across several different outcomes is much more achievable.
