When Covid-19 initially hit I read several articles predicting the costs for raw materials would increase significantly focusing on the anticipated downward shift of the supply curves. At that time, I thought “Not so Fast.” How about the demand curves shifting downward too? I believed the demand curves in several industries would have a larger downward adjustment resulting in lower raw material costs not higher costs as predicted.
On one of my recent consulting contracts I worked with paper and plastic products. When performing research and preparing for negotiations I found that raw materials for both commodities had historic lower costs. The Feds Producer Price Index for Wood Pulp, WPU0911, is at a level not seen since 2010.
https://fred.stlouisfed.org/series/WPU0911
And their Plastic Materials and Resins Index is at a level not seen since 2009!
https://fred.stlouisfed.org/series/PCU325211325211
Curiosity got me to also take a look at the Iron and Steel Index WPU0911. That Index is down also, not to the extent of Wood Pulp and Plastic, but down to 3.5 years low.
https://fred.stlouisfed.org/series/WPU101
So, I ask you, is it time to work with your Supply Chain and lock-in some raw materials at these low costs? When I worked at Philips Medical, we did exactly that during the Financial Crisis of 2007/08. That decision yielded huge favorable Purchase Price Variances and savings on several components.
I expect when we get a vaccine for Covid-19 the Demand Curves are going to jump much faster and larger than what the supply curves can adjust which will drive the costs for raw materials dramatically higher. And, this may not be as far off in the future as you might think with the Oxford group stating they can have a few million doses ready for emergency use by this fall if their tests continue to proceed well. I like to think of this strategy as an analogy to Warren Buffett’s famous quote, “be fearful when others are greedy, and greedy when others are fearful”.