Acute shortage of raw materials hampers Swiss industry in spring 2021

The acute shortage of raw materials is slowing down Swiss industry, creating supply bottle-necks and raising manufacturing costs

In the spring of 2020, the Coronavirus pandemic caused the world’s largest economic powers to close their factory gates and their borders. In late summer of that year, following the first wave and the many lockdowns, global industry started up again and the supply of many goods was initially assured. Nevertheless, then came a period in which demand continued to rise sharply, outstripping the supply of various industrial goods. The Swiss Purchasing Managers’ Index stood at around 69.9 points in May 2021, according to Statista (see Fig. 1). Purchasing prices also continued to rise in tandem

Fig. 1: Purchasing Managers’ Index (PMI) for industry in Switzerland from December 2019 to May 2021

Acute shortage of raw materials leads to supply chain bottlenecks

The current trend in raw material shortages is very clear from the prices of nickel and copper, which have risen by around 35 to 75 percentage points during the last six to twelve months. There are a wide variety of reasons for these price increases. On the one hand, the whole Coronavirus situation of last year led to an abrupt standstill of global industry. As a result, many orders were put on hold and production capacities were reduced. Unexpected successes in the fight against the Corona pandemic caused an explosion in demand for a wide range of goods in the second half of 2020, and production facilities were expected to resume deliveries immediately. However, the problem was that orders had been halted for many raw materials, production capacities were shut down and warehouses stood empty. So there was a backlash: large-scale reordering took place to hedge against any further price increases or possible bottlenecks. A good example of this is the travel industry At the beginning of the global lockdown, all air traffic was brought to a standstill. At the beginning of the global lockdown, all air traffic was brought to a standstill. As a result, staff numbers were drastically cut. With the easing of restrictions in June of that year, demand for air travel spiked again.

The rising prices due to high demand are best illustrated by the producer and import price index (see Fig. 2) of the Federal Office. This rose by 0.8 percentage points in May, an increase of 6.4 percentage points compared to last year. This comparison represents the strongest increase since July 2018. At the same time, China recorded a massive increase in production prices (producer price index) of around two percentage points (see Fig. 3), which in time will also have an effect on the manufacturing costs of Swiss industry. A close watch should be kept on how both indices develop in the near future, as rising raw material and production costs are likely to further aggravate any inflation, thus causing generalized price increases for industrial intermediate products.

Fig. 2: Producers’ and import price index in May 2021
Source: Federal Statistical Office
Fig. 3: China – Producer Price Index (PPI)
Source: Moody’s Analytics

What possible alternative action can companies take in the current situation?

Companies usually have no control over the influencing factors and causes of rising commodity prices. Nevertheless, there are various alternative courses of action which could be taken. Corporate advisory boards should not stand by with their arms folded. Rather, they should take action. The following are some possible alternativecourses of action:

  1. The use of materials can be optimized through new technologies or through design-to-cost, design-to-manufacturing, design-for-assembly approaches. In recent decades, industry has added dynamism to the process of annual renegotiation through price squeezing. This potential has now been exploited as far as possible: the design of a component/assembly must now correspond as closely as possible to a supplier’s production characteristics in order not to generate any additional costs. In a traditional development process, engineers lack the necessary transparency on how their product design might impact the manufacturing process and production line.
  2. Find the “right” partner / supplier A standard supplier buys raw materials at market prices and resells them to their customers at a percentage mark-up. The customer is thus directly affected by fluctuating raw material prices. However, there are partners / suppliers who have a more holistic approach, managing their raw material prices themselves. For example, partners / suppliers might buy in bulk when prices are favorable and thus keep the raw material sales prices relatively stable.
  3. Trading in derivatives. Another option is to participate directly and actively in the futures market for commodity prices. Companies that hold an account with a regulated derivatives exchange can influence commodity purchase prices by exercising options and futures and thus hedge against price increases.