Rising commodity prices: Europe too much dependent on other powers

Monday 12 July 2021

The present price growth is fed by the demand triggered by industrial policy strategies of new emerging countries, by oil increase -  essential energy source for producing many raw materials -  and the boom of sea freights, tenfold increased in only one year. 

The situation is unprecedented, lacking historical references which could help find ways of exit from this rising spiral. No supranational authority is able to intervene to ease tension. It will be possible to come out only when international logistics will become fluid once again and when manufacturing companies - caught out by Covid-19 - will gradually have their warehouses restocked,  given that they were managed for too long during pandemic according to just-in-time logic. 

Among the heaviest and most persistent legacies of pandemic, there is the huge increase of sea freights which continues encumbering commodity supply costs. It is a consequence of the dramatic stop in supply chains tracking to the first global lock-down followed by the boom of commodity demand, which prompted major companies to adopt means of supply control as blank sailing, that is optimisation of routes following agreements between carriers who may act in absence of specific anti-trust standards. Enhancing more profitable routes contributed to congesting destination ports where handling has been long slowed down for lack of personnel and better controls imposed by epidemic. Subsequent geographical displacement between demand and availability of containers and cargos drove freight costs up: the present system of international sea transport is indeed very fragile.  

The above extraordinary increases go on affecting operativeness of national companies, not only for commodity costs, but also for heavy delays in delivery times with possible negative  implications in relationships with customers. These problems may become chronic since sea freight contracts have increasingly both higher costs and longer terms. Most penalised are manufacturing companies which have to ship bulky goods.

Maritime transport crisis will possibly last until fourth quarter 2021, provided that there is no recrudescence of pandemic.

Prospects for next months are complex for other aspects too. High prices for some metals as copper and tin will possibly last, given scarce availability and full-blown gap between production and consumption. As a result impact on cash flow and marginality of companies involved in processing non-ferrous metals and steel semi-finished products is bound to continue.

On the contrary, given what is occurring on international markets, prices of wood and polymers are reckoned to decrease. Concerning this, decisions taken by OPEC will be crucial concerning crude, which is expected to settle around 80 dollars per barrel.

Industrial economy, deemed as replaced by digital economy, has come back as key player while coming out from pandemic but is now tackling with two threats: the boom in commodity prices and extraordinary price increases of transport costs.

Actual problem is indeed that Europe depends too much on others. We have lost a big share of chemical and steel sectors, which in the past allowed us even to export them. Now we are paying consequences of losing that centrality and keeping close to economic recovery will certainly be much more expensive.

Prof. Achille Fornasini (University of Brescia- Scientific Committee ANIMA Economics Dpt)

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