The cost of raw materials and its impact on the industrial sector

Raw materials have been in constant price fluctuation since the pandemic. For three years now, the cost of these materials has risen dramatically, due to a combination of several factors, in addition to the direct influence of the consequences of the pandemic and the war in Ukraine.

According to the Spanish portal eleconomista.es, the rise in raw material prices has a behavioral explanation, “when raw material prices are high, there is a greater incentive to invest in exploration and mining,” says the digital newspaper. But when prices are low, the profitability of that investment decreases, leading to a reduction in production and an increase in prices in subsequent years. And the same thing has been happening in Europe over the past few years. By the time Europe, Asia and the United States began to recover from the Covid-19 shock, there was no capacity to meet the demand for raw materials. At that point, 2021 prices started to rise.

In this way, we can define the main factors that directly influence price increases: global demand and supply shortages. Despite having a less direct influence, climate change also plays a role; droughts, floods and other natural events have affected the production and supply of certain raw materials. As well as speculation by investors seeking to profit from price changes and changes in government policy and regulation, such as trade tariffs and economic sanctions.

All these elements influence the price movement of raw materials, and if we add to this the economic shock that both the pandemic and the war in Ukraine have caused for the sector, the market is destabilized. There has been an impact on the global economy and on consumers that has increased production costs and the prices of goods and services.

Excessive regulations?

Among all the factors influencing price increases, the sector is also talking about the consequences of “excessive” regulation. A study carried out by the CEOE employers’ association reveals the concerns in the industrial sector. According to the analysis in Cinco Días, the influence of the regulatory framework at national and European level is perceived negatively. These restrictions -over-regulation or excessive regulation- are very poorly rated, especially those related to compliance with environmental regulations, as they end up having “high costs and excessive bureaucracy”.

Apart from the direct and indirect factors in the price rise, the West has the ESG, E (environmental), S (social) and G (corporate governance) guidelines that makes the phenomenon settle down, as they keep the same price incentives as other producers but with restrictions. These limitations work as a commitment to society, it shows that the activity that the company carries out is involved in the ethics of the planet, but it places the territories that apply it at a disadvantage since it is not a global regulation.

Stainless steel in the industrial sector

The current economic situation burdens the industrial sector, and so many others, with an inflation in the prices of raw materials that is added to all the other difficulties. In IES Soler we have noticed these changes as all the companies, and practically in all the sectors of activity. However, it is true that our sector, and specifically IES, has been particularly affected by the rise in stainless steel prices. In our company it is a material that is used very regularly, we find it in most of the components for the manufacture of electrical resistors and also in the components of the complete equipment.

In fact, steel is by far the most produced metal. For this reason, fluctuations in its price, no matter how small, have major economic consequences, on both macro and micro scales. It is a material that has an unstable price, which is why it is subject to change and even more so in periods of economic crisis, inflation or recession. According to Confemetal, the prices of metal raw materials (metallurgical manufacture of iron, steel and ferro) reached a year-on-year increase of 45.9% in May 2022.

Where do we stand now?

The impact of price increases has produced several changes, in IES we have reduced the profit margin to generate less impact on the customer’s final purchase. In any case, even if we try to reduce it, it is a change that is noticeable at all stages of the buying and selling process, whether they are suppliers, distributors, manufacturers or buyers.

If we look at the Spri Group’s Industrial Commodities Observatory, which has very up-to-date data, we see that current forecasts show higher price levels for 2023 than in December, but “the evolution of the situation in China will continue to be a determining factor for demand and prices”. In any case, the Observatory expects prices during 2023 to fall short of the 2022 highs. Despite the expectation of a slowdown, prices remain high because it is not only the price of the raw material that plays a role. Other factors also play a role; speculators; energy, transport or salary costs; material shortages; and, currently, the significant inflation in Europe, which is causing final prices not to reflect possible “improvements”.

At IES we always look after the quality of our product and, at the same time, we take care of our customers. For this reason we strive to ensure that the materials we use are of good quality and as competitive as possible in the market.

Thank you for trusting in IES Team, all the professionals of the company are committed to you, we want to grow and evolve with you.