Surge in prices of raw materials casts shadow

The price of the stuff that makes everything is surging.

The prices of raw materials used to make almost everything are skyrocketing, and the upward trajectory looks set to continue as the world economy roars back to life. From steel and copper to corn and lumber, commodities started 2021 with a bang, surging to levels not seen for years. The rally threatens to raise the cost of goods from the lunchtime sandwich to gleaming skyscrapers. It’s also lit the fuse on the massive reflation trade that’s gripped markets this year and pushed up inflation expectations. With the U.S. economy pumped up on fiscal stimulus, and Europe’s economy starting to reopen as its vaccination rollout gets into gear, there’s little reason to expect a change in direction.

China’s industrial sector
A wave of shutdowns and temporary production stoppages across Chinese factories due to surging costs of raw materials has raised concerns over inflation risks in the world’s second-largest economy.

Across Guangdong province, small and medium-sized enterprises in the Chinese industrial chain are lamenting that it may be even more difficult to stay afloat this year than the previous one, reported South China Morning Post (SCMP).

As the COVID-19 pandemic takes a heavy toll on supply chains across the globe, some Chinese manufacturers say it has become too expensive to source the materials they need to make the goods they sell.

Modern Casting Ltd, one of Guangdong’s biggest factories supplying iron and steel castings, said in a statement last week that it will not be able to fulfil the orders it received, citing crippling price increases and a lack of raw materials.

“The cost of casting materials has far exceeded the company’s gross profit, and it has reached the point where we can no longer afford any loss,” the statement said.

A smaller casting factory, JiangXin Foundry Ltd, also had to reduce production, and its chief production manager said that the factory was operating for only four days at a time.

Huo Huagen said that the price of scrap steel, which was the main raw material of JiangXin Foundry enterprise had skyrocketed to more than 4 500 yuan a ton in recent weeks. “It means that, the more we produce, the more we lose. Each ton we produce is equivalent to a loss of 1 500 yuan,” he said.

Meanwhile, workers at the factory are also struggling, with their monthly salaries dropping to about 3 000 yuan as they lose shifts, SCMP reported citing Huo.

“Our biggest customer is [the Chinese branch of] a Japanese elevator company, and we have already proposed a 15 per cent price increase to downstream companies for new orders,” Huo said. “They have not yet responded.”

In Guangdong’s Bangzhan Construction Formwork Ltd, the sales manager said that the price of aluminium had risen to over 20,000 yuan a tonne in a span of two weeks this month.

Global metal prices, including for copper, iron ore, zinc, nickel and aluminium, have skyrocketed in recent weeks. Copper, for instance, has hit US$10 000 a ton while iron ore has been trading above US$200 a ton.

Old steel mills
Steel producers in Europe and America have suffered for years from low prices caused by global overcapacity. Plants struggled to make money and job security became a growing worry. Over 85,000 steel jobs were lost in the European Union between 2008 and 2019, according to industry association Eurofer. That’s all changed dramatically thanks to booming steel prices. Futures in China, by far the biggest producer, have smashed records, even outpacing gains in key ingredient iron ore, as the government took measures to curb output. That’s supercharged rallies of benchmark prices in Europe and America, where mills were already running at maximum capacity as they try to meet unexpectedly high demand.