It’s a perfect example of a pig cycle. Just a year ago, car factories had to shut down their assembly lines due to shortages of microchips. Smartphone launches were postponed. The production of laptops, TVs and game consoles threatened to stagnate, just when everyone was anxiously waiting for those things because of working from home and lack of entertainment. The container shortages made the logistical puzzle even worse.
These corona-induced price increases were exacerbated by speculation in the futures markets, then given an extra boost by the Russian invasion of Ukraine. Everything became more expensive.
But now there is an abundance of chips. Demand has collapsed, causing prices to plummet. Samsung reported a 32% drop in earnings last week. There is even a threat of overcapacity, as factories are being built worldwide in response to last year’s shortages.
Since April, May, the prices of many raw materials, semi-finished products and parts have fallen by 30 to 50 percent. The price of iron ore has fallen from 166 to 90 dollars per tonne. That of crude palm oil from USD 7,200 to USD 3,700 per ton. Wheat does not cost $1,350 on the futures markets, but $900 per 100-bushel contract. Rubber: $3.15 per kilo, compared to 3.85 for the summer. And logistics have also returned to normal. Renting a container to ship goods from China to Europe now costs $4,000; in September last year it was more than $10,000.
Sales prices are not going down
Due to the Russian missile shower, prices have again jumped this week, but the decline is structural. The so-called commodity index, the indicator of the price development of the commodity futures markets in New York, has fallen from 352 to 299 since July 9. That is a drop of 15 percent for an average basket of agricultural products and commodities.
There goes inflation, you might think.
But unfortunately: companies do not find these decreases a reason to lower their sales prices. Although the original cause of inflation has partly disappeared, the costs of services and wages are still rising: an inflation spiral has been born.
For example, Unilever, which needs a lot of raw materials for its care products and edibles, says that not much has changed. “We are still dealing with very high inflation worldwide in agricultural commodities, logistics, energy and labour,” said a spokesperson. ‘As a company, we try to absorb these higher costs by reducing complexity, improving efficiency, cost reduction programs and economies of scale. This does not compensate for all costs and so part of it ends up with the consumer.’
Turnover increases, margin decreases
‘The raw material costs are going down, but on the other hand we see all costs going up: transport, energy, additives, my accountant, really everything’, says Marcel La Feber of packaging materials producer MLF in Zaltbommel. The price index of plastic granules – the most important raw material for him – has gone from 280 to 210. “But it is still considerably higher than 150 during the corona crisis.” He doesn’t make extra profit, he says. ‘I now hear from the FNV about a 12 to 17 percent wage increase because companies would make more profit. That may be true for Unilever and Shell, but not for us. I have 4 percent more turnover, but 10 percent less margin.’
At the moment there are no more problems with chip shortages at the automaker VDL Nedcar. Last year and in the first half of this year, production had to be shut down a number of times for that reason. A spokesman said the situation is now stable. ‘The purchasing is done at BMW, so I don’t know exactly what the situation is like. But it remains vulnerable.’ Memory chip prices fell 10 percent in the third quarter.
Jan Kets of Bouwend Nederland says that purchasing prices for wood have fallen and the wood crisis is actually over. ‘There has never really been a shortage of wood itself. The problem lay with the sawmills, which could not get up and running quickly enough. The softwood price index has fallen from 186 to 155 since this spring.’
Martijn Davids, secretary of the General Publishers Group, says that paper shortages at book publishers are no longer a major problem. ‘At least I don’t hear about it. However, there are complaints that paper is still expensive’, he says.
The scarcity is gone, the prices have remained.