INFLATION
Should I be worried about the price rise in raw materials?
Rising raw material costs are a big factor facing businesses as the global economy experiences a spike in demand for goods. Andy Stafferton chief commercial officer of DF Capital, a UK specialist finance provider, considers what this means for the sector.
The cost of raw materials has been rising recently across multiple business areas. The price of lumber is increasingly volatile, and prices have more than doubled since the beginning of the year.
Andy Stafferton, chief commercial officer, DF Capital
IIn May 2021 it reached a record high point of $1,700 (£1,229) per thousand board feet, but it is now starting to cool and return to normal following a 40 per cent drop since May’s peak. However, prices remain elevated, up by 139 per cent over the last year.
Medium-term expectations are that prices will remain above the pre-pandemic levels for some time to come. Reasons for this include supply chain disruptions, a boom in DIY and home improvements projects during the pandemic, plus the knock-on effect of home working causing less paper consumption and therefore inefficiencies in the lumber market.
However, as consumers start to return to pre-pandemic activities, this should decrease the demand somewhat. We do nonetheless have to be mindful that, in the longer term, house building, the fact that the global construction industry is set to grow, plus an imperfect supply chain where producers seek to hold more inventory to overcome supply shortages, will impact the overall outlook.
Steel prices
With manufacturing and industry being encouraged to continue throughout lockdowns, the steel industry has remained busy. Rising raw material costs and an increase in tightness of supply has led to multiple price rises. Prices peaked at almost 6,000 yuan (£670) per tonne in May 2021, up 70 per cent on the same period in 2020.
Whilst demand has cooled by 20 per cent since then to under 5,000 yuan (£560) per tonne in June, the underlying supply challenges mean that long term forecasts suggest price rises may occur by a further 10 per cent based on analyst reports.
The combination of the pandemic and Brexit has caused new hurdles for ocean shippers – namely a significant shortage in shipping containers which has led to capacity constraints and higher shipping costs.
Shipping costs
The combination of the pandemic and Brexit has caused new hurdles for ocean shippers – namely a significant shortage in shipping containers which has led to capacity constraints and higher shipping costs. This has pushed up components costs for manufacturers and producers, all at a time when global organisations are trying to realign their supply chains after a challenging 2020. Early signs of relief are beginning to surface.
China
China’s economic activities have an impact globally, including here in the UK. Industrial production in China increased 8.8 per cent year-on-year in May 2021. Essentially, this is because its economic recovery is ahead of the recovery in Europe. In turn, China has a greater demand for raw materials for manufacturing which is straining the already stretched worldwide supply chain.
So, what does this mean for manufacturers and dealers? Inflationary challenges and price rises could impact both manufacturers and dealers. Manufacturers have strong order books, however at current rates. Unit prices may increase in the future, driven by factors largely outside of their control. It is then possible that the manufacturers will pass these costs on to the distribution channel, and ultimately end-users, who might not be so accepting.
We’ll wait to see whether dealers and distributors will be able to work together with the manufacturers to solve this challenge, or whether there will be a readjustment in the order book and demand due to this inflationary pressure?