All the reasons why the prices of raw materials have increased

What is happening to the European economy with regard to supply and availability of raw materials, that are increasingly unavailable and expensive? We tried to explain the global reasons that lie behind the lack and the price increases of raw materials.

In the last weeks there has been a lot of talk about the lack of raw materials, that is leading to high price increases and delivery delays in all the production industries, including the furniture one. During the post-pandemic recovery, raw materials are really difficult to find, delivery times tripled and prices increased from 10% to 50%. The shortage of raw materials is affecting the wood industry, with panels and semi-finished products, but also metallurgy and the supply of metals, such as cobalt, copper, lithium, or plastic materials, such as PVC or polypropylene.

This is an intolerable and difficult condition for manufacturing companies and supply chains, including our company Brugnotto Group, that sees the price of all the types of panels, semi-finished products and wood to increase. As Alvisio Senatori, President of Confartigianato Legno e Arredo AN - PU, pointed out in a recent interview, the situation is really serious. Companies have serious difficulties in finding MDF and chipboard. Therefore, they «already point out delivery times of 2 or 3 months and inform that selling prices are not defined».

The complex situation of the shortage of raw materials worldwide can be understood taking into account the sudden acceleration of the futures in the United States. On the basis of estimates, prices have increased by 49% in three weeks since April 2021, reaching values that have exceeded double those of last year in the same period, and reaching one thousand dollars per board foot. As reported by Corriere della Sera, the prices of construction wood and of other raw materials rised in Europe too. They increased by 60-70% compared to last year's negotiations. In addition, the price of laminated wood - one of the most used material in the furniture industry- increased from 400 to 700 euro per m³.

Which are the most significant economic causes that led to the lack of raw materials?

There is a concatenation of different causes and effects. Furthermore, government agencies could neither foresee the problem nor manage it properly. Let's try to make some order in this difficult context.

• The pandemic's effect: the first cause is the Covid-19 Pandemic with its consequent closures, that led the turnover of European companies to drop. The reduction in production rates led to an increase of the fixed costs and a consequent increase of the final prices of raw materials. During the Pandemic recovery, the strong increase in the demand for raw materials, such as wood and metals, has created a significant impact of speculation with empty storage warehouses.
  
  
• The effect of Baltic Dry Index (DBI): the "Baltic Dry Index" is the index defining the sea freight costs for dry and bulk products. Last year this index reached a value of + 605% (source: Agenzia ICE),leading to difficulties and costs increase of transportation. This increase is due above all to the new regulation of the International Maritime Organization, that imposed to the ships the reduction of the sulfur content in oil. As a result, many container ships have been scrapped and prices rose.
  
  
• The China effect: a complicated issue to analyze and to explain in a few lines. As reported by the Economy section of Corriere della Sera, this difficult economic process will not run out quickly and is already leading the global demand for sawn softwood to exceed the actual production reaching 350 million cubic meters. This is also due to the post pandemic program defined by the Chinese government to build wood residential areas for the Tokyo 2022 Olympics. The estimates are quite worrying: according to Assolegno's market analysis, Beijing's demand for structural wood could reach 75 million cubic meters in 2022. Assolegno, FederlegnoArredo's national association of primary processing industries and wood builders, asked the government to intervene to deal with the increase of prices.

Not only wood: the shortage of metals

China has already taken the first steps to secure the availability of other materials too. The Chinese government and the main Chinese companies own the largest metal mines in Congo. The metals, including cobalt, lithium and copper, are then processed and transformed within the Chinese factories. These raw materials have limited availability and are necessary for the green process that is taking place all over the world. For example, lithium is used to produce electric car batteries, while cobalt is essential for the production of iron. As reported by Il Sole 24, battery production in China would have increased by 300% in 2021 compared to the same period of the previous year. In addition, China has signed an agreement with Congo until 2033 to extract these precious metals.

Which conclusions can be drawn on the shortage of raw materials