Automation Insights

"Hope for the best, prepare for the worst": How to strategically prepare your company for future raw material shortages and supply bottlenecks

Companies in the automation industry are currently finding themselves in a highly volatile market environment. The impact of China's zero-Covid strategy on international supply chains and the war in Ukraine are presenting the industry, as well as the entire economy, with completely new and rapidly changing challenges. In addition to exploding energy prices, the scarcity of many essential raw materials is also clouding the mood in boardrooms. In all likelihood, this is not going to be a short-term problem. A persistent shortage is also emerging in the future, as demand will continue to meet limited availability. New crises will accelerate this dynamic. A well thought-out strategic response to this phenomenon is therefore absolutely essential.

Supply chains are currently under heavy strain. At the same time, China's zero-Covid tolerance policy is leading to a kind of "artificial shortage" of all kinds of goods, in addition to the existing crises. This is also affecting logistics goods and related services, causing problems in important trade hubs. For example, while demand for freight containers continues to rise, there is no work going on in quarantined areas, so they cannot be produced or transported in the first place. This is resulting in sharp price increases. For example, shipping a 40-foot container from Asia to Europe used to cost an average of around US$ 2,000 in the early 2020s. Since then, prices climbed to as high as US$ 20,000 in 2021, before falling back to around US$ 12,000 currently.

High uncertainties burden companies

There is no improvement in sight for the future either: when new outbreaks occur, entire regions of China are repeatedly put into complete lockdown, bringing supply chains in these areas to a complete standstill. It is difficult for logistics companies to foresee these circumstances.

The war in Ukraine is also causing uncertainty and difficulties on certain trade routes. One highly public example is air cargo, where there are massive restrictions due to sanctions and airspace closures.

Long-term scarcity of copper brings new challenges

Primary raw materials, which are currently less in focus, could also experience sharp price increases and supply difficulties in the future. Copper, for example, is very important for the automation industry. This raw material offers high current conductivity and is resilient and flexible. These properties especially make copper ideal for use in electrical cables, which are used in control cabinets, for example. The cost of copper has risen sharply again and again in the past. From an average of € 5,500 per tonne in 2019, the price almost doubled in 2022 to as much as € 9,700. The reasons for this are manifold. On the one hand, demand has risen sharply in recent years, which was linked to the growing global economy until before the pandemic. On the other hand, demand from the electrical industry, which is one of the main customers, is currently increasing.

However, the earth only has a limited amount of copper. Depending on estimates, these reserves could already be depleted by around 2050. Moreover, its occurrence is unevenly distributed across the world. Chile has the largest reserves and accounts for about a quarter of global production. At the same time, the market for copper production appears to be an oligopoly. Just under a third of the copper mined worldwide comes from just five companies, which further narrows the price setting.

Some analysts expect demand to double by 2040, which could further fuel price increases. Emerging economies need the raw material to build and expand civil and industrial infrastructure. Highly populated countries in particular need to catch up on this, which will further exacerbate the situation on the market.

The future of copper as a critical raw material

At the same time, copper also plays an important role in the fight against climate change and the energy transition required. In order to make energy production independent of fossil fuel, for example, new wind farms or associated power lines need to be built. These plants also require copper as a raw material, which will further increase demand in the future. What's more, up to three times more copper is needed for the production of electric vehicles than for combustion vehicles. As electromobility is forecast to grow rapidly, this factor may further exacerbate the supply problem.

Overall, copper will become an even more critical resource due to market developments. Producing countries could use the raw material as political leverage - or favour their own economies in the event of an impending shortage by imposing export bans. Companies in the automation industry therefore also need to address this problem in the long term.

Rising gas prices exacerbate the situation

Secondary raw materials are also becoming critical factors in maintaining competitiveness. For example, within the product portfolio of a typical automation company, numerous components are made of metal. A great deal of energy is required to extract pure metal, for which gas is the main energy source. Gas is also needed at other points in production, for example in the particularly energy-intensive manufacture of glass and ceramics. The automation industry also classically needs gas to heat rooms and halls, for example. The fields of application are thus very diverse and involve numerous components.

High price level remains, while further risks loom

Due to the war in Ukraine, this dependence is leading to massive problems for automation companies. Since the beginning of the war, the price of gas has roughly doubled. For private households, the costs rose from an average of 6.5 cents to as much as 14 cents per kilowatt hour.

According to the current assessment, there is a threat of at least a constantly high price level for several years. A further increase in the price level cannot be ruled out - or in the worst case a supply stop. In this scenario, gas will be rationed based on different criteria. Companies in the automation sector would mostly be considered as not system-relevant, which is why a reduction or even cancellation of all gas supplies may loom. This starting position leads us to the following strategic hypothesis:

"Without determined action in the area of raw material security, automation companies are facing severe competitive disadvantages. Management without a raw materials strategy is no longer sustainable in today's world."

Strategic hypothesis

How to prepare your company for short- and long-term raw material shortages

We see the following as ways in which you can strategically prepare for the impending shortage. For the purposes of this exercise, we will stick to the examples of gas and copper in order to be able to provide sample solutions for both short- and long-term counterstrategies. Before working out solutions, however, you should analyse how much you depend on certain resources. You can find this out by asking a few questions:

  • Where is the raw material currently used in my company?
  • Which activities need the raw material?
  • In what quantities is the raw material processed?
  • How critical is the raw material for production?
  • How high is the added value of the components concerned?
  • What's the supplier portfolio situation in my company?
  • How transparent is the supply chain?
  • What is the economic situation of our suppliers and have our partners adequately prepared for possible bottlenecks?

After answering these questions, a comprehensive analysis allows for various tiered solution paths:

  • Internal improvement of procurement

Purchasing plays a central role in managing supply bottlenecks. Here you have various levers to prepare for challenges internally as well. One possibility is to build up stocks. Build up a safety buffer, especially for critical raw materials, to overcome short-term bottlenecks. Although this ties up working capital, the costs can be justified by the risk minimisation. Hedging can also make sense for companies above a certain size. Use financial instruments to hedge against unforeseeable price developments at an early stage. In addition, certain redundancies should be built up as buffers in the supply chains. Spread your risk to avoid getting into trouble if a supplier fails. Ultimately, implementing a data-based and intelligent forecasting model can also make sense. With the help of this type of software, you can make your analysis much more precise.

  • Relocation & outsourcing

Outsourcing parts of production can also make sense when raw materials are scarce. For example, gas is not as scarce in countries with a different energy policy as it is in Germany. Canada, for example, has large gas reserves and is currently negotiating a free trade agreement with the EU. It therefore makes sense under certain circumstances to buy components that are responsible for high gas consumption from Canadian suppliers or to set up your own production locally. Likewise, Vietnam is considered "the new China" when it comes to relocations in Asia, which are supposed to give companies as many of the same advantages of production in the People's Republic of China as possible.  With the help of a clever procurement strategy, you can spread the risk widely and intervene in the event of an impending halt to the gas supply. With this in mind, you should start building long-term partnerships early on and hand over smaller orders to partner companies. Also feel free to join forces with regional competitors in purchasing to find solutions. Together you can achieve more favourable prices.

  • Circular economy

For raw materials such as copper, the reuse of processed materials will play a major role in the future. Copper, just like other raw materials, can be fully recycled. So there is an opportunity to build a closed ecosystem. In the course of delivering automation systems, the manufacturer could take old machines along with him in order to extract recyclable materials from them for production. In this situation, there are no limits to creativity. Consequently, manufacturers could contractually secure the take-back of old appliances after a certain period of time and thus free themselves from the threat of a shortage of raw materials.

  • Restructuring the energy supply

In addition to the reuse of resources, companies can also resort to other ways of supplying energy. The full bandwidth of the green energy portfolio can be used here. Even simple measures such as installing solar panels are an effective first step in the right direction. Companies can also plan major changes, such as the use of biogas or the construction of their own green power plant.

  • Restructuring the product portfolio

Companies also have to think about the issue of raw material shortages and how long it will take for the production of individual product lines to become economically viable. With the help of a comprehensive sensitivity analysis, management should draw an accurate picture of the raw materials outlook. For example, when gas is rationed, high-margin products should be prioritised where appropriate.

  • Waste analysis

Another solution is to reduce the amount of raw materials used. In certain circumstances, you may be able to improve processes to use fewer resources. Initial savings are often easy to achieve in this context. At the beginning, for example, inefficient machines can be switched off and the output of the remaining machines can be sensibly throttled. There is also a lot of potential in the processes. Safety margins can often be reduced. Copper cables, for example, could be made thinner if the technical properties do not change as a result. Better adjustment of machines can also reduce waste. Investment in new machines can be worthwhile, too. The German Federal Environment Agency, for example, estimates that the use of energy-efficient pumps in industry alone could save around five billion kilowatt hours of energy each year. 

We recommend the following measures to automation companies:

  1. Consumption analysis: As a company, you should now ask yourself which raw materials you are dependent on and to what extent. Find out what quantities you consume and where bottlenecks could be critical for production.
  2. Scenario analysis: You can then use a scenario analysis to look strategically at different possible outcomes and their consequences. Prioritise the most important raw materials and consider what might happen in the future.
  3. Catalogue of measures: Create a catalogue of measures to save resources for your company. Think of creative alternatives to the usual procurement methods and thus prevent a production stop.

The right decisions must be made now

Supply bottlenecks and scarce resources are likely to be with us for a long time to come. At the same time, companies in the automation industry have only a very limited influence on the outcome of the situation. Nevertheless, you can prepare for the challenges ahead with the help of forward-looking strategic planning. Make the right decisions now without losing hope for better times at the same time - according to the saying "Hope for the best, prepare for the worst".

Erdödy, S. / Hannig, M. / Kittelberger, D.