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2021 will go into history as the year of shortages. Across the globe, the industrial sector found itself running out of raw materials (such as steel, plastics, and wood) as well as chips and electronic components. This situation has resulted in rising prices and longer delivery times, affecting end products — and, therefore, consumers. Now, the pressing question is, what will 2022 look like?
What has caused shortages?
The shortages the sector has had to deal with were a direct consequence of the pandemic. Although the latter started over a year and a half ago, and the world has since adapted to it, shortages have not disappeared. Why is that the case?
When COVID-19 hit, factories all over the world scaled back production capacity or even temporarily shut down, while buyers reduced their supplies. But before long, the economy seemed to recover, and demand for raw materials increased — even more than expected, as consumption shifted from services relating to tourism, hospitality, and culture to goods like construction materials for the DIY'er, office supplies for remote employees, and sports equipment for those working out at home. On top of that, there was a run on plastic disinfection equipment, cardboard disposables, personal protective equipment, and related safety items.
As most people order these products online, demand for packaging materials and the associated raw materials has gone through the roof as well.
Attempts to make the economy more sustainable have also pushed demand for raw materials to record heights: besides the shift from sustainable raw materials (such as wood and paper), there's a pressing need for scarce metals that enable the energy transition.
But producers of raw materials find themselves in a pickle. They can't scale production fast enough to meet rising demand. On top of that, suppliers invest little in production capacity, as they're unsure whether demand will remain at this level in our post-pandemic world. Meanwhile, the largest producer of raw materials — China — has decided to supply its domestic market first.
All these factors have contributed to the current situation, in which demand and supply of raw materials are out of balance in many markets. This results in hoarding (as people fear more shortages and higher prices) — which, in turn, continues to disturb the balance. The just-in-time principle is increasingly abandoned. Finally, the shortage of containers across the world makes it more difficult to transport raw materials, which makes for even greater shortages.
Dealing with the consequences
In the past year, raw materials have become more expensive, while the industrial sector has had to deal with longer delivery times. The Bloomberg Commodity Index, which tracks 23 energy, metals, and crop futures contracts, surpassed its 2011 peak last fall.
Usually, such developments mainly affect consumers: they see prices increase and have to wait longer for their orders to arrive (remember my co-worker Koen's card game?). But the shortage of raw materials also directly affects end product manufacturers. Prices increase at such speed that suppliers can barely pass on the additional charge to customers, which means their margins are under pressure. Moreover, if there's an insufficient supply of raw materials, they may be unable to meet demand and therefore miss out on making sales.
There is, however, an environmentally friendly side effect to shortages: circular entrepreneurship has accelerated at an unprecedented pace. Demand for circular raw materials has exploded, and recycling companies are working overtime.
2022 (and beyond): what's next?
It's difficult to make forecasts, but the shortage of raw materials will likely continue to exist in 2022 — although it might be a little less pressing than in 2021. Capacity will have scaled up, but that's not to say it can keep up with the increasing demand resulting from the continued global economic prosperity.
Prices will remain above average. For example, the World Bank expects metals to become 5% cheaper, while their prices went up nearly 50% last year.
Jeff Currie, global head of Commodities Research in the Global Investment Research Division at Goldman Sachs, even predicts a new supercycle. That means prices will remain high for years because supply structurally fails to meet demand.
So, how fast will the situation go back to normal? That depends on the raw materials available and the sector — due to the difference in and degree of root causes.