Raw materials shortage puts economic recovery under pressure

A study of the raw materials market has found limited availability is pushing prices sky-high. The supply shortages have caught European companies off guard in particular, with more than nine-in-ten now facing falls in profit this year.

Supply chain managers have faced multiple challenges in the coming months. Continued Brexit strains, and the coronavirus pandemic have both had major implications for logistics firms, and made the transportation of raw materials more difficult, causing supply shortages and price spikes.

According to researchers from Inverto – a firm which was acquired as the procurement and operations subsidiary of Boston Consulting Group (BCG) in 2016 – this could have wide-ranging implications for the economic recovery. At present, 89% of respondents to the firm’s annual raw material study said they were reporting limited availability of raw materials.

Around 100 procurement managers and Managing Directors from the EU and UK took part in the study. Of those, 49% were from the manufacturing industry, while 16% came from the mechanical engineering sector, and 11% from the automotive market. These are each key demographics for producing goods which economic growth depends upon – and if they are struggling to resource the materials they need for that process, it could hamper the economy’s progress, following 2020’s massive recession.

At the same time, this scarcity is sending materials prices soaring, and making it harder for firms to turn a profit. A majority of 92% of firms said they expected falling margins and profits as a result of rising costs, despite countermeasures. This means the number citing material prices as being the top external factors with a significant influence on their business performance have increased by 57-points in the last year.

In response to mounting prices, many firms are moving to ensure supply at the best possible price, by analysing the supply chain and build up stocks. This was found to be the policy of two-thirds of respondents. However, it is not enough, and firms are contemplating measures which will have an impact on consumer power in the coming months.

For 75% of respondents, passing on increased raw material costs to customers is now considered the most appropriate measure. While it is still less applied than supply chain analysis, it is likely to become the most common policy in the coming year, as the perceived ‘relevance’ of passing on costs to customers has increased by 26-points in the last 12 months.

Managing Director of Inverto UK, Thibault Lecat, commented, “In the short term, companies cannot escape rising prices, you can't beat the world market, and this crisis affects everyone – both internationally and the direct competitors. The most important thing businesses can do right now is to secure supplies in order to maintain delivery capacity. Companies that can continue to produce in the current climate have the chance to gain market share, and those who act and negotiate skilfully to accept lower price mark-ups, will be more profitable.”

However, the situation may be about to get worse before it gets better. At the time of the survey, of the raw materials a highest procurement priority, energy was becoming ‘less relevant.’ Electricity was a priority to just 26% of respondents, compared to 44% in 2019, while oil and gas fell from 32% in 2019 to 16% this time out. Now, however, a mounting energy crisis is sending costs for that raw material through the roof, too. It is something which has caught many European companies off guard, with Lecat adding that “the surge in energy prices is causing crisis talks with European political leaders, gas storage facilities are running empty and in some areas there are even fears of cold homes and blackouts.”