Iron, copper and steel — oh, my! Prices for raw materials continue to skyrocket with no end in sight, challenging manufacturers and engineers to rethink the products they make. Let’s look at how industrial professionals are coping with this volatility that they’d rather not face.

Prices for raw materials continue to skyrocket with no end in sight, challenging manufacturers and engineers to rethink the products they make. Let’s look at how industrial professionals are coping with this volatility that they’d rather not face.

A recent IndustryWeek article has a pretty good handle on the cost of raw materials and how it affects manufacturers. While high prices being fetched for oil, copper and the dour effects of wage inflation are putting the squeeze on manufacturers, it’s also forcing them to become more inventive in their engineering process.

“Escalating and extremely volatile raw material prices are challenging manufacturers in their struggle to rein in costs and improve profitability. While it’s a challenge companies would prefer not to face, they are implementing procurement strategies to mitigate those cost increases and level out the peaks and valleys. Alternative materials also are being scrutinized,” said IndustryWeek.

Pat Furey, a senior manager at spend-management solutions provider Ariba, says procurement has been gaining “board level attention” as it relates to controlling costs. IndustryWeek’s own 2005 Value Chain Survey also revealed that more than half of U.S. manufacturers are looking beyond their borders for direct materials.

“When I was in engineering, we didn’t necessarily worry about how many different grades of a given material we were buying,” said Furey in the IndustryWeek article. “We were just [specifying] what worked best and was the easiest to get done to get our product released to the market. We didn’t worry about whether our procurement department was buying 20 different grades of the same basic material.”

Furey says getting procurement involved early during the design stage helps manufacturers to consolidate material specs where it makes sense. Manufacturers and engineers also are examining whether they can increase the amount of reprocessed or scrap material that can be used without negatively impacting the end product. Central procurement departments are also trying to lock in raw material prices not only on their own behalf, but also on behalf of suppliers that make parts for them.

It stands to reason, then, that these types of “price lock-in” techniques will soon receive widespread adoption, particularly in light of the concern posed by commodities analysts, as Purchasing magazine recently pointed out as it relates to copper.

“There is absolutely a fundamental case for higher prices this year,” says commodities analyst Andrew Harrington at Australia & New Zealand Banking Group in Melbourne. “We’ve got a situation where the supply balance is very tight and by some reckoning we’re heading into the end-of-year pool with production falling below consumption.”

But next year may be another story, according to Purchasing, as spot copper prices are due for a fall in 2007 due to the U.S. housing weakness stifling demand and a lack of labor strife keeping the supply line full. A decrease in price is obviously a good thing; however, this type of volatility is what’s causing the cost-control problem to begin with. That’s exactly why some materials producers are jacking up their prices, as Reuters noted of paper manufacturers:

North American paper producers are gearing up for an autumn price hike, as costs keep increasing, according to Deutsche Bank analyst Mark Wilde. Boise Cascade LLC, the fourth-largest North American producer, has recently announced a $40 per ton hike for an array of uncoated free sheet papers, effective Sept. 12.

Wilde says costs for pulp — used to make paper — are still rising and that white paper mills that purchase pulp on the open market are struggling just to reach cash break-even.

Even the current drop in fuel prices, namely oil and natural gas, isn’t helping much, as The Scotsman relays:

A year ago, an oil price of $63 would have seemed like a crisis spike. Now, because of an intervening rise to nearly $80, it is seen as a cause for relief. The worry is that $60 a barrel becomes consolidated in our collective consciousness as a ‘normal’ level from which upward spikes caused by geopolitical upsets may be expected.

The outlook for iron ore prices is just as bleak, as demand is outstripping supply, according to Purchasing. Consolidation has left more than 70 percent of iron ore supply in the hands of three producers, forcing substantial price hikes from steelmakers in recent years, peaking at 71.5 percent in fiscal 2005 and 18 percent in fiscal 2006. A 5 percent price increase is expected when 2007-2008 contracts are signed.

In addition to the aforementioned new direction in procurement practices, manufacturers are keen to deploy new global strategies, as the Journal Sentinel points out. But perhaps more important, experts keeping an eye on the world economy are sensing that it’s not the end of the world as we know it, even as terrorism, fluctuating oil prices and China’s overheated economy increase the cost of raw materials.

“We’re at an inflection point,” said C. Fred Bergsten, director of the Institute for International Economics in Washington.

Resources

Rethinking Raw Materials
by Jill Jusko
Industry Week, Aug. 1, 2006

Copper prices may turn south in 2007
by Tom Stundza
Purchasing, Sept. 13, 2006

Commodity Price Index: Wage inflation could keep materials’ costs high
by Tom Stundza
Purchasing, Aug. 31, 2006

Rising interest in tumbling price of oil
Scotland on Sunday, Sept. 17, 2006

Manufacturing’s new direction
by Rick Barrett
Milwaukee Journal Sentinel, Aug. 22, 2006

Is high-flying economy heading for turbulence?
by Wayne Arnold
International Herald Tribune, Sept. 19, 2006