Raw Material Shortages - Volatile markets are giving purchasers quite a bit of a headache for some time now. However, this might be the less severe problem compared to supply shortages that have to be expected or that are here already for a notable number of strategic raw materials. Many companies down the value chain seem to be not alarmed, yet.

But it is obvious that disruptions in the raw materials supply chain will have major effects on availabilities and prices of all parts and components that need these materials in their production process. Rare earths, for instance, are needed for many technically advanced products in electronics, in "green products", etc. and cannot be substituted by other materials without substantial loss in performance, quality, endurance, or cost-effectiveness.

Strategies for Volatile Markets

The short term problem is volatility. And this disturbing condition of certain supply markets is prone to stay for quite a while due to speculations by professional investors that are not backed by real demands for raw materials. As a matter of fact, nobody can really predict where certain supply market prices will go in the short- to mid-term. Purchasers therefore already switched to short- and very short-term contracts, wherever possible and reasonable.

Financial instruments (hedging) are applied by larger companies, for a price premium, of course, but the majority of small and medium-sized companies have to struggle closing one contract after the other at more or less acceptable conditions. Only some companies, such as the sports equipment manufacturer Puma, are going for long-term contracts in order to have a more reliable basis for price calculations for their next collections to come. Others, such as Adidas, from the same industry seem to be luckier, since they outsourced their entire production.

However, this is neither always possible nor desirable in any case. It is the sad truth that so far investment companies, banks, financial agents and other people with lots of many are gambling intensively on the raw material markets. Companies in need for these materials are well advised to apply technical and chart analyses in order to have a chance not to get "ripped off" by the markets.

Prepare for Supply Shortages

It has been reported frequently in the media that China delivers up to 97% of all rare earths for customers around the world.

As announced by the Chinese government, China is closing down illegal mines and is putting more pressure on the mining companies and consecutive production stages to stick to the more severe (or less lax) environmental regulations. But the major threat to companies outside China is that the government wants to make sure that companies producing in mainland China have access to all raw materials needed for production, and that this supply comes for very competitive prices. As a matter of fact, China itself already consumes 60% of all strategic rare earths on the market.

Due to the fact that especially heavy rare earths are primarily needed for innovative technologies, China uses this pole position to foster its own industries. Furthermore, companies from abroad are forced to invest into the Chinese market by setting up manufacturing facilities on the mainland, thus bringing highly welcome, latest technologies into the country.

Supply Strategies for Strategic Materials

Many companies work hard on finding substitutes for critical materials. Henkel, for instance, invented new polymers to overcome supply shortages in ethylene vinyl acetate, a substance needed for producing adhesives. Another, strategy might be backward integration. German energy company RWE for instance set up a plant for pellets production in Georgia, U.S., to benefit from the large timber resources in this state, while demand for timber products in the U.S. is declining. It is a profitable option to export pellets to Germany and use them as biomass in their usually coal-driven power plants.

As most industries went in the opposite direction from the 100% self-owned value chain practiced by Henry Ford in the early 1910s, backward integration seems an odd opportunity. Companies like Porsche or BMW are down to 15% value-add of the automobiles they are producing. However, backward integration in this case could mean jumping all the way to the beginning of the value chain in order to get access to strategic raw materials that are critical for one's own production process or for other members of the value chain the companies has to rely on.

There are more examples from the steel industry where the steel producer invested in mines to back-up supply options. In some cases, getting involved in the first step of the value chain could not only secure supply but may also help in pushing the environmental and/or ethical image of the company. Nestlé, Mars and Unilever are all engaged in projects to help farmers in the developing world to set up a more effective and more efficient farm. They work on convincing farmers to quit planting coca and switch to cocoa, coffee and the like by awarding them with long term contracts. Accompanying social projects for better education, medical fitness, etc. are run.