Economic slump on the horizon
Clear skies becoming overcast
Our tenth edition of the Raw Materials Study is marked by the uncertainty experienced in 2019. The gloomy economic situation and ongoing trade disputes are creating anxiety among the companies that responded to the survey. This is a massive contrast to the previous year, when economic growth called for all hands on deck.
Last year, almost 60% of respondents said they feared not being able to procure the raw materials they needed, compared with just under 30% this year. While that figure has halved, the number of those expecting sales to fall has doubled.
Trade disputes on everybody’s mind
Raw material availability and price fluctuations have had a considerable influence on performance for well over 70% of companies that responded. It comes as no surprise that companies are concerned about trade disputes, since raw materials are generally traded at a global level. More than 80% expect trade barriers and customs barriers designed to safeguard political interests to increase, or at least remain at the same level. Just 17% believe that free trade will reign again after the Brexit process has been completed and the Trump presidency has come to an end.
Understandably, many have prepared themselves to encounter customs barriers in global trade. This is resulting in measures such as qualifying new suppliers in other procurement markets or shifting volumes between existing suppliers. What is more, a quarter of respondents are planning to implement at least one such measure. It is interesting to note that over 50% of companies surveyed are looking to shop closer to home, with Europe being mentioned as a region that is increasing in importance for raw material procurement, followed by China at 40% and Russia at 28%.
Long-term contracts for planning security
Managers do not expect prices to continue rising or resources to remain scarce, in view of the economic downturn. On the contrary, most suspect that prices for raw materials will see a moderate fall. One exception, however, is energy prices. Half of respondents believe electricity prices will increase, while a third envisage the same happening for oil and gas. Very few fear an actual shortage of raw materials.
To counteract the effect of price fluctuations, 70% of survey respondents are attempting to conclude long-term contracts where possible, and a further 20% aspire to do the same. Despite that, the past twelve months have shown that not very many suppliers are willing to sign contracts for the long term. 40% of respondents have been forced to procure the raw materials they need at the daily rate – almost three times higher than what they had originally planned. If the current economic downturn is here to stay, these figures are expected to change, and more suppliers will be open to concluding longer-term contracts.
Another popular measure to secure production is to build up, increase or reserve stock. Shortages can of course be better tackled with a larger warehouse, but a measure like this requires long-term capital. So, decision-makers should carefully consider how much of a buffer they actually need to ensure security of supply.
Seeking innovative solutions
The most commonly used strategies are certainly effective in securing a supply of raw materials. But there are other, far less commonly used options that could come in handy. Admittedly, these do take more time, and are usually associated with initial investments and closer cooperation with production. They also call for the support of executive management and the specialist departments, and cannot be implemented by procurement without consulting the powers that be.
They include using alternative materials, something which 40% of respondents reported that they already do. The benefits are clear: if you can replace a raw material that is affected by a dispute or in short supply, then you eliminate the procurement risk. Using recycled materials and reducing raw materials usage are further ways to minimize the risks to raw material procurement. Both strategies are seen as sensible solutions by respondents, but they are hardly ever implemented. When it comes to digitization, there is a clear gap between what companies are thinking and what they are actually doing. Almost half of survey respondents think it makes sense to use business intelligence tools in raw materials procurement, yet only one fifth actually use them. This figure is in line with the general findings on digitization. The tools are there, as is the desire to use them, but companies are struggling to find the right solution and deploy it.
Despite the current uncertainties, only few companies plan to secure their raw material supply through direct access, i.e. vertical integration. Our study revealed that just 5% have opted for this measure. The vast majority of respondents, on the other hand, expect politics to create the framework conditions that ensure raw material supply for the economy. Given that the current uncertainty has mainly been caused by political circumstances, this expectation is understandable, and governments have recognized this. The German Parliament, for example, is currently working on a new version of its raw materials strategy to help support businesses.
However, it seems implausible that governments in Europe would intervene in the markets as much as the United States under Trump or even China are doing. After all, this runs contrary to the principle of a free global market economy.
is a principal at INVERTO and head of the Industrial Goods and Automotive Competence Center. In this role, he is responsible for the Raw Materials Study. The business studies graduate advises customers from the automotive, plant and mechanical engineering, and transport and infrastructure sectors.
Instead of waiting around for political solutions, the onus is on companies to expand their raw materials expertise on their own initiative. Procurement needs to work with executive management and production to find innovative solutions and secure their own supply effectively. By calling for cooperation and creativity from everyone involved, it is even possible to substitute critical raw materials in some cases.
About the Study
For this year’s Raw Materials Study, INVERTO questioned 87 managing directors, board members and procurement decision-makers. The respondents are in the retail, mechanical and plant engineering, and chemical and process industries. A white paper containing the study’s findings and recommended actions can be found on our website: inverto.com/rawmaterialstudy