Factors impacting raw materials – what’s happening and how are manufacturers and distributors being affected?
2 July 2021
Current market conditions are driving up the cost of many raw materials. So, if you’re a manufacturer or distributor, you may have recently been inundated with price increases across multiple areas of your business. These raw material rises are impacting production costs, leading to price rises for dealers and/or consumers. We take a look at what these market conditions are and how this volatility is impacting manufacturers and distributors in 2021.
Timber shortages are impacting the supply chain
The price of lumber is increasingly volatile and prices have more than doubled since the beginning of the year. In May 2021 it reached a record high point of 1700 USD (£1229) per thousand board feet, but it is now starting to cool and return to normal following a 40% drop since May’s peak. However prices remain elevated, up by 139% 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 price rises
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% on the same period in 2020. Whilst demand has cooled by 20% 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% based on analyst reports.
Higher 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.
Economic recovery in China
China’s economic activities have an impact globally, including here in the UK. Industrial production in China increased 8.8% 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?
This is the first in a series of “DF Capital Insight” pieces looks at the challenges that dealers and manufacturers might be facing. Do give us a call if you would like to discuss further.
Call us on 020 3937 6390
Email us at enquiries@dfcapital.bank
