Steel and Other Commodities Continue to Surge in Price
Regardless of what business you’re in, you don’t need a reminder about inflation. It is everywhere you look as your input costs continue to rise. The Fed and ECB both continue to maintain that this inflation is “transitory” in nature. We’ll take a look at the factors effecting this. As a business owner or manager it’s crucial to plan ahead. And as we’ve learned, you need to be ready for anything these days.
Factors that point to inflation persisting
There are so many variables to consider, it may be hard to determine exactly how everything will play out. At least it’s good to be aware of the landscape and what’s on it. Here are some of the major things that could mean inflation is here to stay.
• Cost of transport. Costs for container shipping have skyrockted this year, almost quadrupling in price. This affects everything that is shipped. The costs don’t appear to be going down anytime soon. From random port closures due to COVID to rising demand, the pressure is on for prices to rise. The Baltic Dry Index is at an eleven year high. Look at a chart, that will say it all.
• Supply chain issues. This is related to the above point. As ports, factories and such close due to either COVID related issues or hiring issues, supply chain delays will persist. This in turn will raise prices as producers and manufactuers adapt. The input cost for manufactuers in Germany has gone upabout 10%. That’s unheard of.
• Continued high demand. The demand for everything from microchips to tomatoes is surging, due to higher consumer demand after the lifting of restrictions and higher commercial demand as businesses spend stimulus money. This may level off, but for now, it seems strong. Amazon is now running 164 flights a day for deliveries just to keep up with demand.
• Inflation begets inflation. As prices rise and materials are harder to come by, many companies are stocking up on needed materials. This only makes the problem worse.
• Infastrucure bill. Its unclear if and when this will pass. If it does, we’re looking at billions of dollars being spent on raw materials.
For Steel in particular there are other factors at play:
• China has cut steel production in order to work toward their environmental goals.
• India is looking to ramp up production, so that could offset China somewhat.
• In its largest price hike in over a decade, Toyota Motor will raise the price of steel materials and goods that it sells to suppliers.
• Benchmark steel prices are up about 87% year to date, to almost $1,900 a ton. Steel prices averaged about $600 a ton in 2019, the year before the pandemic.
• Demand from Latin America surged the first half of this year.
• Demand is expected to abate in 2022. But anything can happen between then and now.
So how does it play out? In the past, inflation has caused the economy to overheat, which leads to a recession. So many of the inflation levels are the highest they’ve been in thirteen years. Thirteen years ago was 2008. We all remember how that played out. We’re looking at a possible recession in Q2 of 2022. It could be severe, since things are so extreme now. No need to fret about it, just prepare and adapt.
The one silver lining if there is a recession – it will cause inflation to abate. There will be less demand obviously. That being said, any business that works to be a in strong position will be able to take advantage of any opportunities that may arise. So don’t fret. Keep your eye on the indicators, have plenty of materials in stocks, and always monitor input costs.
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