It has been a wild ride for raw materials in the past 12 months, which can't have made U.S. manufacturers too happy. According to a number of studies, raw material concerns always have been and remain top of mind even in a less-than-robust economy. For example, a recent survey from buying consortium Prime Advantage showed that raw material costs were the top concern of 53% of manufacturers queried. And a quarterly survey from AMR Research named commodity price volatility as one of the top three supply chain risks (cited by 30% of respondents) worrying business executives.

It's not as though the worries are misplaced. For most manufacturers, materials costs (not just raw) make up the largest component of their cost of goods sold, even as labor costs seem to attract the greatest attention. Last fall, prices for many raw materials and intermediates soared to heights that left many manufacturers gasping. Then the economy collapsed, as did manufacturing, and many of those same materials costs deflated as well. Now, of course, the upward price creep is unmistakable as conversation about a recovering economy gains steam.

Meanwhile, in June the United States demonstrated its concern over continued access to raw materials, filing a World Trade Organization (WTO) case against China over export restraints on several raw materials, namely bauxite, coke, fluorspar, magnesium, manganese, silicon metal, silicon carbide, yellow phosphorus and zinc. China is a leading producer and exporter of these raw materials, which are key inputs for numerous products in the steel, aluminum and chemical sectors. European Union officials asked for WTO intervention as well.

"The United States is very concerned that China appears to be restricting the exports of these materials for the benefit of their domestic industries, despite strong WTO rules designed to discipline export restraints," said U.S. Trade Representative Ron Kirk in announcing the WTO case. Not only do the Chinese export restrictions limit access to the raw materials, but they also can "significantly" raise the world market prices for materials while lowering prices for domestic Chinese producers, according to the Office of the U.S. Trade Representative.

What should U.S. manufacturers be doing in the face of such raw materials volatility? Don't sit still, experts say. Rethink purchasing strategies, assess risk and consider changes to your production processes, such as those taken by manufacturer Anomatic Corp. Actions taken today can mitigate raw material risks in the future.

Expect Prices to Keep Rising

The use of recycled aluminum has helped Anomatic Corp. both reduce its raw material costs and meet requests from customers. Several of the manufacturer's own sustainability efforts, which include the waste water treatment system shown here, have had a side benefit of reduced costs as well.

It's not simply growing demand that is starting to drive up prices, even as the manufacturing sector shows some signs of life and China appears to be restocking its inventories. Supply chain experts point out that in many raw materials markets, major producers have idled capacity in the wake of poor demand and used existing inventories to meet orders. "Producer inventory levels are now very low in historic terms, and manufacturers are finally starting to ramp up production to meet orders. But given that some capacity was permanently idled and that inventory levels will take months to replenish, we are dealing with a diminished supply problem rather than an excess demand problem," states Patrick Furey, senior category manager for spend management solutions provider Ariba.

While many raw material prices are below year-ago levels, don't assume they will remain that way, or even fall back. Indeed, the best pricing is likely past. "For the most part, prices hit their low points in the first six months of this year and they have been on a steady climb since," says Furey. For example, he noted in mid-September, "Commodity plastic resins such as polypropylene and polyethylene are up 50% from their pricing lows earlier this year, but they remain down 30% when compared to last fall. Likewise, copper has doubled in the past six months, but remains 10% below last fall's price. Steel and aluminum are both up more than 30% in the past three months, but are down 50% and 20% respectively when compared to the fall of last year."

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