Soaring prices for raw materials are hitting UK manufacturers increasingly hard – and it is only likely to get worse. According to the Office for National Statistics (ONS), the costs manufacturers bear for raw materials – their input prices – to manufacture their products rose by 14.6% in the year to March 2011. The upwards trend in the price of oil is also likely to push up their costs even further. While some manufacturers appear able to source raw materials elsewhere, it would seem the increase or volatility in price has fast become a business-critical problem. And although alternative sources are often available, these can turn out to be either inconvenient and/or time-consuming to access.
The other problem associated with alternative sourcing is that it often leads to the situation where manufacturers are obliged to purchase far larger quantities than they would normally need. Thus, they inevitably pay more and, as new customers, receive shorter credit periods than from their usual suppliers.
THE DEAL WITH STEEL
The single biggest current supply issue appears to be with varieties of steel, with manufacturers experiencing difficulty obtaining stainless, mild and sheet. Then there is the 'China effect', which, as a leading producer of, amongst other materials, magnesium, zinc and manganese, has exerted something of a stranglehold on other markets.
Image: Steel - rising in price and difficult to obtain
For example, in June 2009, the USA filed a World Trade Organisation (WTO) case against China over export restraints on several raw materials that were key constituents of products from the steel, aluminium and chemical industries. The EU also sought WTO intervention. Both cite China as restricting the raw materials for the benefit of their own domestic industries through raising the world price, while at the same time having a lowering effect on the equivalent domestic market prices. Such practices contravene the WTO rules that were designed to discipline export restraints and most certainly would have had a knock-on effect for UK manufacturers.
Allied with raw material risk, there is also 'high supply risk' – related to physical supply more than to political or economic factors – affecting certain raw materials that noticeably originate in one country only. While China has the 'honour' of appearing in both categories, the latter is simply a result of a high concentration of the product originating in that country, and there being low substitutability and similarly low recycling rates.
Where else do supply issues arise? Instances of high supply risk raw materials also include cobalt from Canada and/or Congo; beryllium from the USA; graphite from India; platinum group metals from South Africa and/or Russia; and tantulum from Rwanda.
The overall effects have been devastating for some UK businesses. One struggling Tyneside engineering firm, AEI Cables in Birtley, has axed 126 posts – despite winning a multi-million pound order last year to provide cabling for the Royal Navy's new aircraft carriers – blaming soaring raw material costs for the decision. Chief executive Clive Sharp says the company has been hit hard by a big rise in raw material costs, particularly copper. Meanwhile, creditors have agreed a restructuring plan to allow the plant to continue making cables for the defence and civil engineering sectors. The UK is not the only one suffering from soaring raw materials' prices. According to the independent Sheffield-based international steel market information suppliers MEPS (Management Engineering and Production Services), rising prices seem to be the norm worldwide. And it acknowledged that increasing raw material costs, rather than an increase in demand, is the trigger that's inflating steel prices.
Across Europe, in particular Western Europe, an increase in 2011 prices was anticipated towards the end of 2010 and many suppliers commenced restocking at the end of the year to take this into account for the start of their 2011 rolling schedules. However, buyers are fully aware of further potential increases in prices, very much in line with the expectant or even imminent increases in the prices of raw materials. While trading with, and purchasing from, third countries (any country not a member of the EU, but which involves partners or participants from one or more EU countries) are still not on a competitive par, they may, in fact, begin to look so, if the current price increases are maintained.
When it comes to steel in particular, the world's steel-producing economies have been slowly forcing its price, and of steel by-products, upwards. The upshot, as the Financial Times predicted in February this year, is that the price could rise by as much as 66% before 2011 is over. Recent research commissioned by the Manufacturing Advisory Service (MAS) North West, on behalf of the North West Development Agency (NWDA), on raw materials and their supply has revealed that a majority (75%) of respondent manufacturers have a problem with sourcing their materials and with the price of those materials.
Image: The world's steel-producing economies have been slowly forcing its price, and of steel by-products, upwards
Faced with such a dilemma, most manufacturers have no option but to pass on the speedily rising costs of their raw materials to customers. This will not only pressurise an already increasing inflation, but could lead to the Bank of England rethinking its strategy with regards to interest rates.
NOT A RECENT PHENOMENOM
"What is clear is that the increases in prices as a major concern for manufacturers are by no means a recent phenomenon," says Ed Moss of MAS NW, "with some commentators saying that the overall downturn in business and the tightening of finances [slow payers and obtaining bank finances] is seriously exacerbating the current round of raw material price rises. Non-ferrous metals such as copper, for instance – which has risen from $2,000 to $10,000 a ton during the past decade – is almost all imported, so there is no opportunity for import substitution."
One aspect relating to raw materials that needs to be pointed out, he adds, is that of self-inflicted stock mishandling, "something requiring a relatively easy resolution to correct – and especially pertinent in the case of raw materials that both cost good money and have a finite shelf life. "Buying more than is being sold is the obvious overstocking symptom where the forecast for raw material requirements are overstated and manufacturers can end up not selling the finished product," adds Mr Moss. "Those who don't forecast customer demand accurately enough – by exponentially smoothing the demand and not talking to the customer – are vulnerable to such exposure; while those best weathering the raw materials price storm are the ones implementing the 'diagnose, plan, act, adapt' principles of manufacturing planning and control."
MAS NW has found that many manufacturers are of the opinion there isn't much new information available that might help them, and it has been perceived as being simply the 'state of the economy' and associated problems to do with supply and demand. There is a current groundswell of opinion amongst manufacturers that attending an event of like-minded manufacturers might help. The advisory service responded immediately to this major issue for its region's manufacturers and invited NWDA (North West Development Agency) expert Sarah Downes, head of sustainable consumption and production, to speak at its MAS Essentials Event, 'What manufacturers need to know about raw materials'.
"There is a lack of activity to help businesses with forecasting where both material challenges and future resources will come from," Ms Downes told Machinery. "For this reason, we are looking to set up COSMIC – the Centre Of Sustainable Manufacturing Innovation and Collaboration." COSMIC will be a collaboration between the North West's world-class research institutions and north west manufacturers, currently operating from the UK's largest manufacturing region. It will investigate: how to substitute to lower impact; identifying more plentiful resources; increasing closed-loop recycling; and embedding sustainability into mainstream manufacturing. "I've set up a small working group with North West universities, the Environmental Sustainability KTN and The Manufacturing Institute to develop the COSMIC proposal further," she adds. "We would like to engage more with manufacturers to understand how we provide the best solutions for them.
"The North West is the largest manufacturing region in the UK and home to some world-class research establishments. Our vision is to bring manufacturers and universities together to help manufacturers, particularly SMEs, future proof against increasing resource pressures (which impact on them in increased prices, increased price volatility and pressure on supply).
"We want to put NW manufacturers at the forefront of developing a low carbon, low resource economy. One of the key issues is awareness; smaller businesses are more exposed to resource issues that manifest themselves in price increases and smaller businesses are often the businesses that don't have the awareness, capacity or resource to plan for this."
The main target for COSMIC, at present, is to develop a business plan by October. This will set out exactly what type of support it will provide to businesses and outline how this will be funded. "We're looking at ways we can involve businesses to provide the right tools to help them deal with these issues. This will include awareness raising and support to innovate, including better design, substituting materials, using less (being more resource efficient) and opportunities for recycling/reusing more – from cradle to cradle where we can. We're looking at how best we support businesses along and across supply chains to deal with the challenges they face."
Global steel production is at an all-time high (fuelled by growth in Asia), she points out, with the Financial Times predicting that prices are set to rise further to over $900/tonne. Prices for copper, meanwhile, have risen to $11,000/tonne (from $2,000/tonne 10 years ago). "Some studies estimate 35 years' worth of copper reserves, based on 2008 production levels," she points out. "This deadline could come closer, given increased demand for copper for new and low carbon technologies. The UK alone will need an additional 431,000 tonnes of copper by 2030 to meet our targets for offshore wind farms."
The good news is that these metals are highly and infinitely recyclable. "One job that COSMIC is looking at is how to estimate how much of these materials we have in the North West economy, how much we need and how much more could be recycled," she concludes.
 Manufacturers in the North West having materials supply issues and who would like funded assistance, should call MAS on 0800 093 9077, as should any manufacturers interested in joining COSMIC.
Additional information below
Box item 1
Threats to supply lines
There are significant threats to the supply of strategic metals. The report on Materials Scarcity by the Resource Efficiency Knowledge Transfer Network (REKTN, now the Environmental Sustainability Knowledge Transfer Network—ESKTN), identified the following eight threats to assess the security of supply of a material:
• Global consumption levels
• Lack of substitutability
• Global warming potential
• Total material requirement (how much material is dug from the ground to produce a given quantity of metal)
• Monopoly supply
• Political instability in key supplying regions
• Vulnerability of key supplying regions to climate change.
It is the view of Wolf Minerals, a mining company developing a tungsten reserve in Devon, for the supply of strategic metals "the UK economy has relied for decades on the laissez-faire concept that other nations will provide".
Box item 2
Glut of issues
While some manufacturers have consistently seen problems associated with the sourcing of raw materials for 20 years or more, most manufacturers identify the current main problems as having arisen only within the past three years or less. Some of the most common problems reported are:
• The rising costs of materials, due to transport costs and rising fuel prices
• The economic downturn
• China now charging higher prices for export, so it can subsidise its own manufacturing industry, and Turkey and China buying in all the scrap, so what is left is poor quality
• Stockholders having reduced their holdings, due to a lack of bank finance
• The costs of European legislation/red tape.
There is also the issue faced by all manufacturers who don't hold large stocks of raw materials when quoting for a job, due to the ever and fast-rising costs of raw materials.
First published in Machinery, July 2011