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Metals and plastics: a raw materials emergency

Published: - 03/05/2021 Author: Di Maggio, EIC
Metals and plastics: a raw materials emergency

The scarcity of raw materials has now become an emergency plaguing companies in the mechanical sector and many others. It concerns steel, but also non-ferrous, plastic, and chemical materials; it is a problem of shortage on the market, but also of exponential price increases. This heavy ballast is bringing many companies, both large and small, to their knees.

This was discussed during an in-depth webinar entitled "Raw material price fluctuations and impact on industrial production", organized by ANIMA Confindustria – the Federation representing the Italian mechanical engineering industry - on April 20.

"It is a situation of profound imbalance," commented Prof. Fornasini of the University of Brescia, "characterized mainly by the lack of supply on the market."
The expert analyzed all the stages that led to this conjuncture—a path that began last year with the outbreak of the pandemic.

Already in Q2 2020, China began providing its economy with extraordinary financial injections, which allowed the Asian giant to secure exceptional hoards of raw materials: oil, iron ore, non-ferrous metals, polymers, everything accumulated with strategic purposes. The weakness of the dollar helped to accelerate the process. In the third quarter of last year, the world economy began to move again, and demand to increase: prices entered a bullish trajectory. European safeguard clauses also prevented a consistent rebuilding of inventories in the old continent, along with the widespread uncertainty that has held back stockpiling. In the last quarter of 2020, financial speculation rediscovered commodities, and an extraordinary acceleration in prices began. In Q1 2021, advanced economies saw a marked improvement in the outlook for industrial production, and supply began to no longer keep up with demand. The lockouts, plant closures, and the blockades of mining activities have been weighing heavily. The problem has been exacerbated by the fact that logistical difficulties, also linked to anti-Covid controls, have increased the lack of containers. Moreover, freight rates have impacted the price of goods movement heavily.

In short, all this – together with other concomitant factors – has contributed to unleashing a "perfect storm", as Prof. Fornasini has defined it, with tremendous repercussions on the competitiveness and productivity of the companies involved.
What awaits us for the remainder of the year? A general economic recovery, but not before rebalancing the gap between supply and demand, which is the main problem on the table. There has been an exponential growth in demand, which supply is currently unable to cope with.

Rather than talking about price fluctuations, we are dealing with real rebounds. For instance, in the spring of 2020 oil went to -68% weekly average (dollars per barrel) and then jumped up to +137% in early 2021, continuing to run upward. Its price could settle between $60 and $75 per barrel. Oil has dragged the price of energy, which has followed the same trend. We can expect a settlement of oil prices – still at fairly high levels – when air transportations and the automotive industry resume their full march. Polymers, too, had a downward movement in Q1 of last year, with a surge from October onward, and increases between +42% and +59% (monthly averages, US$/ton), depending on the specific material. The price hikes continue and seem unstoppable. According to Prof. Fornasini, the corrections we will see in the coming months will presumably be substantial.

Regarding aluminum: buyers today tend to buy in excess, with natural consequences on prices. Considering weekly averages (US$/ton), aluminum touched -19.5% in 2020 and then reached +39% at the start of 2021. We are still in an upward phase toward the 2018 highs.

The copper front is a big sore point: after a maximum loss of -22.8% in 2020 (weekly averages, US$/ton), we witnessed in early 2021 a violent upward spurt of +64.4%. The curve has continued to rise until the present day. It will settle, but prices will probably remain at 9400-9800 US$/ton, as 2021 average, and will definitely go toward historical highs in 2022. For copper, it has to be said that there continues to be a shortage of metal on the supply side. There have been several mine closures, and stocks have thinned. With such high use of copper in power grids and battery-powered vehicle circuits, supply might still struggle to keep up with growing demand in the immediate future when it comes to the energy transition.

As the Italian business newspaper Il Sole 24Ore also summarized on April 27, "copper reached a ten-year record, aluminum a three-year high, and steel and palladium are at unprecedented prices."

Turning to steel, iron ore lost relatively little in the first part of 2020 and then shot up in the second half of the year. At the moment, the curve is settling down – we are at US$ 180/ton – but, when the supply from Brazil will increase, a downsizing is to be expected toward an annual average of US$ 140/ton. Hot-rolled coils have followed a similar trend all over the world. In Italy, the path of prices for flat products (coils, black sheets, and galvanized sheets) has been even more extreme, exceeding -10% for some products in 2020 (weekly averages, euro/ton), to then skyrocket to even +69% at the turn of the year, and continuing even higher today.

An interesting analysis of the current condition of the steel market has also been conducted by MEPS: “The reduction in trade volumes is exacerbating the global supply shortage and fueling the upward momentum in steel prices, worldwide. (…) Trade between East and West is expected to remain low. With no significant drop in demand anticipated in the short term, global steel prices are likely to rise further.”

A new Chinese measure regarding steel products will certainly have an impact on global operations. From May 1, China will raise taxes on steel exports and cut tariffs for ferrous imports in an effort to bolster domestic supply and slow the pace of carbon emissions. As stated by Argus Media, “tariffs will be canceled on imported billet, pig iron, crude steel, and recycled steel raw materials and increased on exports such as high-purity pig iron.” VAT rebate reduction from 13% for many products, including hot-rolled coil, wire rod, and rebar, “is going to boost the upward steel price momentum seen in the international trade in the short term”, predicts Platts.

To complete the overview, ferrous scrap – considering the FOB Black Sea – fell as much as -29% (weekly averages, euro/ton) in the first quarter of 2020, then rebounded later in the year and soared to +104% in early 2021.

"We are witnessing how all our sins are finding us out," this is how Prof. Fornasini has bitterly commented on the Italian situation. "We have given up on basic chemistry, on blast furnaces, and these are the results of the fact that in Italy we are totally dependent on foreign countries for our supplies of raw materials." There is also another problem: European safeguard clauses, adopted in a significantly different historical period than today, are interfering with the fluidity of imports and purchases. These protectionist measures, which affect 26 steel categories and have an expiration date of June 30, would need to be softened and revised to allow many sectors at the brink of exhaustion to catch their breath.

For more information about ANIMA, the Federation representing the Italian mechanical engineering industry, click here >>

Photo by Martinelle, Pixabay

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