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Assessing The Rising Input Costs Associated With The Global Pandemic


Update: According to “Trading Economics” as of 7th January 2022, Steel rebar futures is sitting at just above CNY 4,600 a tonne (€637 a tonne).

This is, of course, a drop from the price we saw in April last year. It can be assumed that the price of steel rebar has somewhat stabilised from the previous highs, but still far higher than the pre-pandemic prices.

However, there are current factors that could keep pressure on the current price and output as per Trading Economics:

“The highest (price) in over a week buoyed by restocking demand and renewed steel production controls in Tangshan city. Industrial companies in China's steel hub were ordered to cut their production after an orange alert for heavy pollution was issued on January 3rd. Top steel producer China is expected to keep output restrictions in place to ensure smog-free skies as it hosts the 2022 Winter Olympic Games in February. On the demand side, low temperatures have been reducing construction activity in many parts of China”.

The current price is sitting under the mean price for the last year while also considerably lower than the all-time high of CNY 6198 in May 2021.


Increasing Input Costs for Manufactured Items of Metal, Steel etc.

There is no doubt that there has been an upward trend on metal prices for some time now initially for copper and aluminium driven by the demand for EV’s globally, but this trend has accelerated hugely in recent times and migrated into the steel industry also. The trend actually started in 2018, lost momentum in 2019 due to economic downturn based on US import taxes etc and during 2020 saw poor demand but prices remained static due to reduced production. But in the last 12 months prices have increased rapidly and we now see a 40% increase over this period. See Fig 1 below which is for rebar, but this gives you an idea of the baseline shift for steel. All other grades have suffered the same increase and only the cost per ton has changed but the trend is the same.

Fig 1: Source: Trading Economics

The main drivers have been the increased demand for steel globally, reduced steel manufacturing capacity and the increased cost of ore, which in the case of ore is demand driven but also due to the fact that much of the ore extraction during the pandemic had ceased. Right now, there is a shortfall and pipelines need to be replenished. Considering China alone there are some other factors. The Chinese government had a huge stimulus package during the pandemic building roads and bridges etc which caused a huge demand for steel at a time when the steel-making industry was shutting down and ore was not being extracted during the pandemic.

In fact, to keep some of the Chinese steel mills running during the course of 2020 the Chinese bought redundant cruise ships and others which were in perfectly good condition for scrap to keep these projects going.

As we come out of the global pandemic the demand for steel has risen sharply faster than the manufacturing capacity has come back on stream and faster than the ore pipelines can be filled and get back to normal operating levels. European steel manufacturing capacity is currently at 75% approx. of its pre-pandemic levels and it will be some time before it’s fully restored to normal operating levels.

It is widely accepted that the current price of steel is not sustainable in the long run which is the view held by many in the industry and all are trying to predict the top of the market and when the market will return to normal.

The feedback we currently have from the steel market in China is that prices are set to increase further in May 2021 possibly by €150 per ton and there is limited visibility of the market turning anytime soon. What we can say at this point in time is that the current high cost of steel is here to stay in the short term and prices are still increasing at this time.

It is estimated that higher prices could remain for 2021 and it will be Q4 before manufacturing capacity is restored and pipelines are fully re-established.

But there is significant pent-up demand for many global commodities and this demand will fuel prices for some time to come.


Increasing Sea Freight Costs

One other key input cost that has increased significantly over the course of this pandemic is the cost of sea freight. Also, note that added to this is the impact on lead time which continues to be a problem at this time.

In Q1 of 2021, the sea freight costs went up by 700% (see Fig 2 below) where containers that normally cost $2,000 went to $14,000, with some less frequent shippers costing even more to $20,000.

The increase in cost has been mainly due to the availability of sea containers in China. Basically, as economies shut down many containers were in the wrong part of the world and the situation is further exacerbated by the fact that some of the shipping companies have also shut down or collapsed during the 2020 pandemic. Many of these companies that were struggling in the market opted to scrap vessels for an immediate cash injection to help out during the pandemic.

Fig 2: Source: Financial Times

Lead times have been severely affected by these issues since Q4 of 2020. During the course of 2020 containers got stuck either on the dock or in the ship haul, and quite often for weeks on end. Ships refused to sail half empty and waited until full so that they would not incur further losses. This phenomenon started in Asian in Q1 of 2021 and eventually occurred on local smaller freighters from the main shipping hubs to smaller countries like Ireland.

So increased costs are the order of the day and are set to stay with us for best part of 2021. Looking at the input drivers for steel it will be Q4 before these issues are resolved and depending on demand at this time this will set the steel price. The Chinese government have stopped or are finishing internal stimulus projects which should reduce demand, but it will be hard for prices to come back to pre-pandemic levels anytime soon or even into 2022. Many of the large companies and governments around the world have incurred huge debt which is going to have to be paid down and how this is done remains to be seen. The same can be said for sea freight.

In short, it’s going to be hard for companies to give up the increased revenue knowing they have debt and an overall climate of rising costs driven by global governments around the world.

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Donlouco Ireland has been manufacturing components and parts for European companies for over 15 years. With its head office in Cork, Ireland, Donlouco oversees the entire process from volume production right through to quality inspections and delivery to clients’ doorsteps. Experts in planning scheduling and delivery to Europe from the Far East.

Donlouco are highly experienced in Supply Chain Security, Sea and air freight management, Commercial Risk management, Demand schedule management and Cost control management