The Global Financial Crisis (GFC) of 2008 caused a massive domino effect. Ultimately, the GFC turned into a prolonged recession for most countries. Every industry has felt the crunch of static or shrinking economies. The raw materials industry suffered tremendously as a result of the GFC. Shrinking economies means shrinking production, which means less need for raw materials. Virtually every country in the world has tightened up their manufacturing efforts, reducing total quantity.
Decreasing Production Drops Raw Material Pricing
During the early 2000s raw material prices hit record highs. China ramped up production, taking the Gross Domestic Product through the roof. Developing markets in Africa, South America and other parts of Asia also increased the demand for raw materials. High demand with limited increase in production ability of raw materials drove prices up. Increased costs on raw materials resulted in increased costs on finished goods, driving the global recession in the wake of the GFC. A large concern about the global recession has been the extended duration. Many countries have faced double dip recessions during this financial crisis, making recovery a very rocky process. The supply and demand relationship easily explains the price fluctuations faced by the raw materials industry.
High demand with limited supply = High prices
High demand with unlimited supply = Stable prices
Low demand, regardless of supply limitations = Low prices
As demand for raw materials dropped, decreasing prices were inevitable. Unfortunately, not only have prices dropped, but ordered quantities also dropped, leaving the raw materials industry facing a double blow.
Manufacturers Tighten Up on Operations
All manufacturers in every industry now face the challenge of staying profitable in a very different market condition. During the early 2000s, over production meant a lower profit margin, not a loss. Today, over production can mean bankruptcy. The automobile industry has cut production by as much as 50 percent in some cases, affecting nearly 5 percent of workers globally. In India, many low value goods and the textiles industry, in particular, face severe losses. One of India’s larger raw material exports was textiles. Now, the rupee is performing better on the global market, driving up the prices on their exports, and leaving many producers in a very tough situation.
Decreased Chinese Manufacturing Hits Raw Materials Hard
China is the number 2 manufacturer worldwide, trailing the US by only 2 points. The US produces 20 percent of manufactured goods with China right behind at 18 percent. The US significantly reduced manufacturing in the wake of the GFC, and Chinese growth stalled tremendously. China’s manufacturing capacity remains, but the financial woes of the US and Europe dried up the market for manufactured goods. No market resulted in decreased production numbers. When one of the world’s largest producers stops producing at capacity, the raw materials industry takes a huge hit.
The raw materials industry has a long way to go before it reaches the numbers it was posting during its peak in late 2008 and early 2009. As other market sectors recover so will raw materials. All manufacturing depends on raw materials. The drop in price on raw materials is one factor that helps to spur growth. Over time, production levels will stabilize offering new growth opportunities in the raw materials market.
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