Study: Manufacturers in Europe expect further double-digit price increases for raw materials

The coronavirus crisis has severely unbalanced the supply and demand of raw materials for the production of durable goods. While manufacturers had to scale down 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 bottlenecks, especially in the recent past. 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 have 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 secondary metal raw materials, for example. The strongest increase was recorded for wood, where the price in Germany doubled since September. "Every two to three days, commodity prices are adjusted upward. The trend is set by North America and China, where prices are already a third higher than in Europe," says pricing expert Danilo Zatta of the management consultancy Horváth. "It's even getting to the point where more and more craft businesses are having to stop working and apply for short-time work because, despite a high level of orders, 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 affected industries are assuming further price increases in the double-digit range. "Empty warehouses, constrained supply and persistently high demand are leading to the long-term overextension of commodity markets," Zatta said.

Lumber price could reach record high in December

For wood, the manufacturers interviewed expect an increase of up to 33 percent by the end of the year. In the UK, where Brexit is making wood procurement particularly difficult, respondents even indicate possible increases of up to 180 percent for certain types of wood. The strongest driver is cited as the continuing high demand for wood products. With the easing, the economic crisis seems to have been finally overcome, and the population's willingness to invest is on the rise again. The main demand is for indoor and garden furniture, as well as terraces, balconies, fences, carports and even complete wooden prefabricated houses. "People are spending more time at home due to working from home and contact restrictions, and they want to beautify it. Added to this is the sustainability trend, which makes wood a particularly attractive material," says Danilo Zatta of Horváth. 42 percent of participants also point to a decline in supply.  "Some geographic 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 shipments, delaying deliveries, Zatta said. As an example, the expert cites Siberian larch, which is also in great demand in Germany but is currently in short supply. With the delta variant rising exponentially, 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 wood by December 2021.

18 percent price increase forecast for hot-rolled steel

For another raw material, hot-rolled steel, prices per ton have already risen by 60 percent since the beginning of the year. The industry expects a further increase of 18 percent by the end of the year. "Due to mass cancellations of orders at the height of the coronavirus 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 offset by customers who have nearly depleted their inventories to stay as liquid as possible during the crisis and now want to replenish."

Price for plastics at record high again - trending upwards

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 have seen 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 used for hygienic reasons to prevent infection. In addition, supply bottlenecks were caused by extreme weather in the USA, where energy supplies were disrupted by a cold spell. As a result, plastic materials such as polyethylene (PE) or polypropylene (PP) are more expensive than they have been since 2015. Other commodities 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 commodities will continue to be the order of the day after the 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 caught between suppliers demanding higher prices and customers to whom an increase cannot be passed on immediately," Zatta said. "Short-term courses of action include adjusting prices based on forward-looking price indices, segmenting supply to differentiate prices, and using surcharges." According to the expert, three rules should be observed when adjusting prices: First, they should be planned in a targeted and systematic way. Second, increases should be differentiated and selectively passed on to customers, for example by market segment, distribution 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 must then be checked via controlling in order to be able to quickly take countermeasures in the event of negative customer reactions.

About the study

For the "International Market Study on the Rise in Raw Material Prices" by management consultants Horváth, a total of 1,041 executives from manufacturing companies in Europe were interviewed between March and July 2021, including 145 manufacturers from Germany. Other respondents were from Italy, Great Britain, France, Spain, Switzerland, Austria, the Netherlands, Belgium, Sweden, Norway and Denmark. Three-quarters of the respondents are 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.

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