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Inflation in commodity costs could hamper manufacturing revival says Eversheds

03 May 2011

Although global confidence in the manufacturing industry has been on the increase, experts are warning that inflation in emerging economies, combined with rising prices for commodities such as oil and steel, could pose a significant threat to the sector. Robin Johnson, partner at international law firm Eversheds, comments:

"Inflation in commodity costs could seriously damage what has to date been a strong recovery in the manufacturing sector. The question now is whether the lean processes put in place during the recession can help to offset some of the cost, or whether the costs can be passed on to Original Equipment Manufacturers (OEMs) and then on to consumers.

"If the costs can't be passed on in whole, the manufacturers' margins and therefore revenue lines will in turn be affected. This has created a perfect storm. Manufacturers have had to make cut-backs, and although demand has continued to grow, albeit fragile, the scarceness of commodities, which was an issue even before the recession, has started to take on an even greater significance now. As a result the importance of 'control' of commodities in emerging economies such as Africa will become both a political, economic and trade DOHA concern.

"Obtaining long-term secure supply contracts could therefore be the biggest issue facing manufacturers in the next 12 months. 'Take or pay' contracts may become prevalent, meaning that you 'take' or, if you don't, you are required to pay anyway. Sole or exclusive or regional supply chains will be key.

"In the longer term I can see this issue extending outside of areas such as steel and energy, and starting to impact on commodities such as food and water. We could even see the industry reverting back to the 1960's, in which local stockpiling became the norm, as today's logistics costs combined with the impact of climate change requires suppliers to avoid reliance on long supply chains and dramatically reduce the gap between themselves and their customers."

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