The coronavirus crisis has severely upset the balance between supply and demand for raw materials for the production of durable goods. While manufacturers had to reduce 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. In addition, unfavorable natural events such as extreme drought or damage caused by bark beetles have led to shortages, especially in the recent past. Supply chains that were interrupted or disrupted by lockdowns had to be gradually reactivated.
The icing on the cake was the traffic jam in the Suez Canal and the blockade of one of the world's largest container ports in China. As a result, commodity prices have almost exploded. On average, prices have risen by 30% since fall 2020 and 20% since the beginning of the year - with peaks of 65% for metallic secondary raw materials, for example. Wood has seen the sharpest rise, with prices in Germany doubling 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 is even going so far that more and more craft businesses are having to stop work and apply for short-time working because, despite a high order situation, there are simply not enough raw materials to be procured on the market, even at overpriced prices."
As a recent Horváth study of more than 1,000 managers from manufacturing companies in twelve European countries shows, manufacturers do not expect the price spiral to end in the medium term. Quite the opposite: whether wood, steel or plastic, gas or methanol - the affected sectors expect further double-digit price increases for almost all raw material groups. "Empty warehouses, limited supply and persistently high demand are leading to long-term overstretching of the commodity markets," says Zatta.
Wood price could reach record high in December
The manufacturers surveyed expect timber prices to rise by up to 33% by the end of the year. In the UK, where Brexit is making timber procurement particularly difficult, respondents even indicated possible increases of up to 180% for certain types of wood. The continuing high demand for timber products is cited as the strongest driver. With the easing of restrictions, the economic crisis appears to have finally been overcome and the population's willingness to invest is increasing again. Demand is particularly high for indoor and garden furniture as well as terraces, balconies, fences, carports and even complete prefabricated timber houses. "People are spending more time at home due to working from home and contact restrictions and want to make it more beautiful. Added to this is the sustainability trend, which makes wood a particularly attractive material," says Danilo Zatta from Horváth. 42 percent of participants also point to a decline in supply. "Some geographical areas such as Sweden, Germany, Ireland, the United States and Canada have had to temporarily reduce or interrupt their normal production activities. In addition, border closures to limit Covid-19 infections have restricted commercial transportation and thus delayed deliveries," says Zatta. As an example, the expert cites Siberian larch, which is also in high demand in Germany but is currently in short supply. With the exponentially increasing delta variant, respondents now also fear further lockdowns in Europe and thus the continuation of strong demand, resulting in a new record high in the price of timber by December 2021.
18% price increase forecast for hot-rolled steel
For another raw material, hot-rolled steel, prices per tonne have already risen by 60% since the start of the year. The industry is expecting a further increase of 18% by the end of the year. "Due to mass order cancellations during the coronavirus crisis, some steel producers have shut down entire production facilities and used the forced break for lengthy maintenance work," says Zatta. "The economy then recovered faster than production volumes could be ramped up again. The limited supply is offset by customers who have almost used up their stocks in order to remain as liquid as possible during the crisis and now want to replenish them."
Price of plastic back at record high - with an upward trend
The unexpectedly rapid economic recovery has also driven plastic prices up 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 experiencing a surge in demand. Large quantities of plastic are also required for short-lived consumer goods despite the sustainability trend, as plastic packaging for food and takeaway products is increasingly being used to prevent infection for hygiene reasons. In addition, there are supply bottlenecks due to extreme weather in the USA, whose energy supply was disrupted by a cold spell. As a result, plastic materials such as polyethylene (PE) and polypropylene (PP) are more expensive than they have been since 2015. Other raw materials affected by sharp price increases include copper, iron ore, oil, palladium and rhodium. Materials and semi-finished products are also seeing sharp price rises, which is hitting the furniture industry particularly hard.
Manufacturers must get used to price jumps - and be able to act at short notice
According to Horváth expert Zatta, sudden price increases for raw materials will continue to be the order of the day after the pandemic, as extreme weather events, infrastructure disruptions, financial market developments, trade conflicts and logistics problems on the increasingly strained transport arteries are increasing and the consequences are having an immediate and strong impact due to the high degree of globalization.
"The increases will often continue to come so suddenly that manufacturers will find themselves in the grip of suppliers who demand higher prices, with customers on the other side to whom an increase cannot be passed on immediately," says Zatta. "Short-term options for action include adjusting prices on the basis of forward-looking price indices, segmenting the range to differentiate prices and working with surcharges." According to the expert, three rules should be observed when adjusting prices: Firstly, they should be planned in a targeted and systematic manner. Secondly, increases should be passed on to customers in a differentiated and selective manner, for example according to market segment, sales channel or product group. Thirdly, early and transparent customer communication is necessary. At least the most important customers should be specifically informed about the price increases and their background. Controlling should then be used to check the immediate effects so that countermeasures can be taken quickly in the event of negative customer reactions.
About the study
A total of 1,041 managers from manufacturing companies in Europe, including 145 manufacturers from Germany, were surveyed between March and July 2021 for the "International market study on the rise in raw material prices" by management consultancy Horváth. Other respondents came from Italy, the UK, France, Spain, Switzerland, Austria, the Netherlands, Belgium, Sweden, Norway and Denmark. Three quarters of the respondents were Chief Executive Officers (CEOs), Chief Financial Officers (CFOs), Chief Sales Officers (CSOs) and Chief Procurement Officers (CPOs). The sectors are divided into automotive, furniture and furnishings, household appliances and other electronics and packaging.
