Will Materials Costs Ever Come Back Down?
Supply managers charged with sourcing materials are experiencing something of a rude awakening this year. With each new supplier invoice more costly than the last, the price of materials is now orders of magnitude higher than it was just a year ago. And while many expected lingering turbulence from the pandemic, the crisis has put a historic squeeze on material costs beyond anyone’s expectations. For now, prices remain at all-time highs, with no sign of returning to earth anytime soon.
Material prices are at all-time highs
Prices for most essential materials began to rise as far back as May and June of 2020 and are now reaching — or in rare cases, retreating from — record highs. Increased prices have made it difficult for manufacturers to source essential materials, including lumber, concrete, and aluminum.
Steel prices have shot up approximately 300% since April 2020 — an extremely problematic scenario NAHB Senior Economist David Logan discussed in a recent article. “Steel mill products price volatility is greater than it has been at any time since the Great Recession,” Logan said, “Over the past three months, prices have climbed 22%. Perhaps more concerning than rising prices is that the pace of price changes has quickened each of the past nine months.”
Unfortunately, economists and other industry professionals predict more strife yet to come. They expect prices will continue to hover near their peaks through the end of the year, putting the squeeze on producers and fueling fears about a potential inflationary problem everyone hopes to avoid.
Industries most affected by material shortages
Most industries are feeling the negative effects of material shortages, but it’s hitting some harder than others. The construction industry is struggling with steel and wood shortages. In March, steel suppliers increased prices for some of their products by $300 to $400 per ton. The massive effects of price increases on building materials reach beyond construction to its associated industries, including real estate development and building contractors.
Other industries hit particularly hard by materials shortages include automotive manufacturing, metal fabrication and machining, electronics manufacturing, furniture production, and machinery production. This price appreciation comes at a time when many of these industries are already dealing with congested supply chains and employee shortages.
The reasons behind price inflation
Material prices are high, and growing higher, for several reasons. Supply chain issues caused by the COVID-19 pandemic are the chief contributing factor. Demand didn’t slow during the pandemic, which meant manufacturers had to find other ways to source materials. A much higher demand for supplies caused inevitable price increases. Other contributing factors include the rising costs of fuel and labor. In summary, a confluence of headwinds is slamming the manufacturing industry — with few tailwinds to counter them.
Will prices ever come back down?
It’s easy to look at skyrocketing material prices and assume the worst. Luckily, it is the nature of economies to ebb and flow. Prices will eventually return to earth. The question is: When? Industry experts predict price turbulence will continue through the end of the year — and perhaps even into next year. Until then, it’s up to manufacturers to make the most of what they have and find new, creative ways to keep costs down until the pricing surge passes.