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Raw Materials

Double-Digit Price Increases Feared

23. Juli 2021, 08:48 Uhr   |  Heinz Arnold

Double-Digit Price Increases Feared
© AdobeStock_Olivier le Moal

Wood could increase in price by a third by the end of the year, steel by a quarter, plastics by at least 20 percent - intelligent pricing strategies are called for.

The Corona crisis has severely upset the balance between supply and demand for raw materials used in the production of durable goods. While manufacturers had to scale back production and inventories due to the pandemic, demand for furniture and other furnishings, as well as construction and renovation materials for interiors and exteriors, increased. This was compounded, particularly in the recent past, by unfavorable natural events such as extreme drought or damage caused by bark beetles, which led to shortages.

Supply chains that had been interrupted or disrupted by lockdowns had to be successively reactivated. The "icing on the cake" was the Suez Canal traffic jam and the blockade of one of the world's largest container ports in China.

As a result, commodity prices almost exploded. On average, there have been price increases of 30 percent since the fall of 2020 and 20 percent since the beginning of the year - with peaks of 65 percent for metal secondary raw materials, for example. The strongest increase was recorded for wood, where the price in Germany has doubled since September. "Raw material prices are adjusted upwards every two to three days. The trend is set by North America and China, where prices are already a third higher than in Europe," says pricing expert Danilo Zatta from management consultancy Horváth. "It's even going so far that more and more craft businesses are having to stop their work and apply for short-time work because, despite a high order situation, there are simply too few raw materials to be procured on the market, even at overpriced prices."

As a recent Horváth study of more than 1,000 executives from manufacturing companies in twelve European countries now shows, manufacturers do not expect the price spiral to end in the medium term either. Quite the opposite: whether wood, steel or plastics, gas or methanol - for almost all raw material groups, the industries concerned expect further price increases in the double-digit range. "Empty warehouses, limited supply and persistently high demand are leading to long-term overstretching of the raw materials markets," Zatta said.

Lumber price could reach record high in December

For lumber, surveyed manufacturers expect an increase of up to 33 percent by the end of the year. In the U.K., where Brexit is making lumber procurement particularly difficult, respondents even indicate possible increases of up to 180 percent for certain species. Continued high demand for wood products is cited as the strongest driver. Relaxations in Corona rules appear to be rekindling the public's willingness to invest. With the delta variant rising exponentially, respondents now fear further lockdowns in Europe and thus the continuation of strong demand, resulting in a new record high in the price of wood by December 2021.

18 percent price increase forecast for hot-rolled steel

Hot-rolled steel prices per ton have already increased by 60 percent since the beginning of the year. The industry expects a further 18 percent increase by the end of the year. "Due to mass order cancellations at the time of the Corona crisis, some steel producers shut down entire production facilities and used the forced break for lengthy maintenance work," Zatta said. "Then the economy recovered faster than production volumes could be ramped back up. The limited supply is matched by customers who nearly depleted their inventories to stay as liquid as possible during the crisis and are now looking to refill."

Price of plastic at record high again - trending upward

The unexpectedly rapid economic recovery has also driven up plastic prices sharply, as this raw material is needed in large quantities for almost all durable goods such as real estate, cars, furniture and household appliances, all of which are seeing a surge in demand. Despite the sustainability trend, large quantities of plastic are also needed for short-lived consumer goods, as plastic packaging for food and take-away products is increasingly being used for hygienic reasons to prevent infection. Added to this are supply bottlenecks caused by extreme weather in the USA, where energy supplies were disrupted by a cold snap. As a result, plastic materials such as polyethylene (PE) and polypropylene (PP) are more expensive than at any time since 2015. Other raw materials affected by sharp price increases include copper, iron ore, oil, palladium and rhodium. And materials as well as semi-finished products are also seeing sharp price increases, which is hitting the furniture industry particularly hard.

Manufacturers must get used to price jumps - and be able to act at short notice
Sudden price increases for raw materials will continue to be the order of the day post-pandemic, according to Horváth expert Zatta, as extreme weather events, infrastructure disruptions, financial market developments, trade conflicts and logistics problems increase on increasingly strained transport arteries, and the consequences are immediate and severe due to the high degree of globalization.

"Increases will continue to come often so suddenly that manufacturers will find themselves in the pincer of suppliers demanding higher prices, with customers on the other side to whom an increase cannot be passed on immediately," Zatta said. "Short-term courses of action include adjusting prices based on forward-looking price indexes, segmenting supply to differentiate prices, and using surcharges."

Three rules for price adjustments

Price adjustments should follow three rules, according to the expert: First, they should be targeted and systematically planned. Second, increases should be differentiated and selectively passed on to customers, for example, by market segment, sales channel or product group. Third, early and transparent customer communication is necessary. At least the most important customers should be specifically informed about the price increases and their background. The immediate effects should then be monitored by the controlling department so that countermeasures can be taken quickly in the event of negative customer reactions.

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