By  For the last 2 months, most of my suppliers have sent me emails informing that the prices of their raw materials have been increasing significantly (up 8%-19%), so they have no alternative but to slightly increase their prices.

If we look closely at the commodity market for the last 3 months of 2016 , China’s imports of commodities increased unexpectedly last month putting the world’s second-largest economy on track to set records for shipments of iron ore, coal and soybeans .In iron ore, the surge to one of the highest on record was partly due to the arrival of shipments delayed by the week-long Golden Week festival at the end of October.

What is surprising is the buying has been strong even as steel mills and copper fabricators prepared to slow output for weaker demand from the construction sector during the winter months.

On the demand Side

The world economy is still recovering , The Chinese economy is slowing down and the Chinese winter ( known for low demand de commodities ) which usually lasts through February , may keep commodity supply weak The Chinese RMB had lost 10% of its value against the USD dollars during the last 14months , makes the import less attractive.Traditionally , the buying spree across commodities does not continue into December as consumers stock ahead of the holiday at the end of January the Chinese new year.

On the Supply Side

With demand picture and The surge of commodity imports , this is a possibility of inventory accumulation , which may put pressure on the prices to go down in the next coming months.

The debate dividing the market is whether this growth can be sustained into next year, or will be going back to the downside. There is no real reason for this rally in commodities .Therefore that leads many analysts to thinks that high prices are driven by speculation because they haven’t seen any real support from the demand side. The commodity prices in china were beaten up for last two years , and maybe some traders have seen a buying opportunity for short term gain..

The Chinese government is already stepping in to fight speculative trading in the commodity exchanges in Dalian , Zhengzhou and Shanghai  by raising transaction charges.

 If the material price goes up by 15%, should the total product price also go up by 15%?

Well ,It depends on the percentage of that material in the final cost in your product.It is important for buyers to understand the cost structure of their products to better negotiate any potential increase.

If the metal consumption is the highest cost contributor, therefore a proportional increase makes sense.Yet, I have seen situations where the metal only contributes about 50% of the final product cost, but the supplier requested a proportional increase. which makes no sense.

Conclusion:

Chinese suppliers should expect some volatility in the market and in the cost of their production and buyers should anticipate to see the prices of their imported products from China to go up.

BY Jamal Mernissi