Commodity Pricing Is Entering Unstable Territory for Manufacturers
From lumber to petroleum, soybeans to solvents, commodities make the world go ’round. For manufacturers, they’re also the basic drivers of the value stream — without them, there is no production cycle. The problem is, every qualified commodity in the world is either in short supply or increasingly expensive right now. And while it’s easy to point the finger at COVID-19 for these issues, the problem is one that’s rooted in lingering supply chain inefficiencies.
While the pandemic caused big problems for supply chains, the inability of global producers to reset them has put the world at the mercy of consolidated suppliers. This, combined with isolated incidents like the Suez Canal block, Texas’ February storms, and Brexit’s trade tensions, has made a world full of commodities extremely difficult for the global economy to access.
Prices are on the rise and commodities are scarce
According to the March 2021 Manufacturing ISM® Report On Business®, every commodity tracked by the index is either trending upward in cost or listed in short supply. Every industry is affected.
“Demand remains strong. Significant supply impacts on raw materials due to the Texas freeze. All major raw-material and suppliers on force majeure,” says an industry executive from the chemical products sector. Another executive in the fabricated metal products sector echoes this sentiment, saying, “raw-material prices are up 50 percent to 60 percent over the last six months, which results in increased prices to our customers and a disincentive to build inventory.”
Manufacturers face a grim prospect in an attempt to acquire the most essential products for their businesses. This struggle has pinched them into an unwinnable debacle.
Raise prices or slash margins?
While pricing flux in manufacturing isn’t uncommon due to the fluctuating nature of commodities, scarcity is driving a harder bargain that many manufacturers can’t compete against. Faced with sustained pricing inflation, many producers have begun to pass these costs on to customers. Consumer staple manufacturer Kimberly-Clark raised the price of diapers and consumer paper products, for example.
Other manufacturers have avoided passing on costs at the cost of their own margins. But as the struggles drag on, diminished margins begin to take a toll. For public companies, diminished shareholder returns are only tolerated for so long. For smaller companies, thinning margins could be the catalyst that forces failure. Passing on costs could hamper client relationships, leaving many companies in a no-win gambit.
The broader implications of this predicament
There are broad economic headwinds to consider if the cost and availability of commodities don’t stabilize in the near-term. A commodities super-cycle, for example, could see commodities swinging wildly up and down as demand waxes and wanes based on cost. The real trouble comes from how manufacturers will be forced to respond.
Broadly speaking, as manufacturers pass on costs to customers, inflation will follow. This could put a damper on the broader economy’s ability to move past the pandemic, stunting sector-specific areas like hospitality and tourism or entertainment. There’s also the concern of a devaluing dollar as the costs of global currencies respond to commodity pricing.
There is no easy answer to restoring stability to commodities. The best answer is a concerted focus on supply chain restoration and strengthening — this can at least restore availability, with the hope that pricing stability follows.