Manufacturing activity during the pandemic tanked in April and May last year and has been inching toward recovery ever since. As manufacturing activity rebounds, companies are experiencing volatility not just in demand but also in raw material prices, which have been rising.
Recovery in the automotive, construction and certain other manufacturing sectors pushed up prices of steel, aluminum, plastic and other fundamental industrial materials. This will have a cascading effect on the rest of the supply chain. The global automotive industry’s investments and global policy commitments for electric vehicles have seen the price of cobalt and nickel – key elements in making batteries – rise, and those are set to spike in 2021.
Economies such as China and Japan have focused on clean energy adoption and fossil fuel reduction in their growth plans and budget allocations. The European Union has set targets to reduce pollution by 55% by 2030 which will encourage spending on metals and technologies that reduce greenhouse gas emissions. President Joe Biden’s administration is also focused on clean energy by earmarking a portion of his proposed $1.9 trillion relief package toward renewable energy and infrastructure.
Consequent to this global focus on clean energy and net-zero emission targets, industrial demand for copper and nickel, which are used in new-energy technologies in addition to traditional uses, is set to reach record highs.
Supply chain disruptions have also contributed to price increases. The transition of some supply chains from China to other Asian countries, such as Vietnam, due to geopolitical conflicts, has overwhelmed the production capacity in some of these countries. This has also put pressure on the trade infrastructure in Vietnam, causing port congestion and equipment delays.
Spot prices of liquefied natural gas (LNG) have fluctuated from lows during last spring’s pandemic-induced supply glut to soaring levels now. Freezing temperatures in Northern Asia are driving up demand and disrupting deliveries of LNG to the region, and shipping capacity constraints have disrupted the supply of LNG elsewhere. Overall shipping rates, inland transportation and related container equipment rates spiked in 2020 due to constrained shipping capacity and a surge in imports from China, and those rates continue to remain at elevated levels.
These disruptions and their ripple effect on prices underline the importance of having comprehensive contracts with suppliers and customers, proactive arrangements to avoid paying reactive spot prices, and price hedging mechanisms. Extraordinary disruptions such as the pandemic may limit the efficacy of traditional measures to manage prices, but predictive forecasting capabilities based on real-time data in conjunction with strong relationships with suppliers and customers can help limit negative fallout.