Supply Risks and
Cost Increases
Companies could be faced with a ‘perfect storm’ of simultane-
ous price increases of energy, metals and other commodities

Supply

Resources are getting scarce due to population growth and rising living standards. The potential impact on companies is twofold:

  • Shortages, affecting security of supply
  • Rising prices of raw materials, leading to cost increases

Some materials could become so scarce that access to resources can no longer be guaranteed. An example is the case of rare metals. China produces 95% of these materials and has decided to reserve a larger share for domestic use, which could result in availability issues across the globe.

Furthermore, basic economics imply that reduced availability will lead to higher prices and thus higher cost for businesses. Some analysts predict that companies will be faced with a ‘perfect storm’ of simultaneous price increases of energy, metals, food and other commodities. A glimpse of this phenomenon could be witnessed in 2008, and even more strongly in 2011.

World commodities price developmentsIn response to these threats, there are three possible actions that companies can take to reduce supply risks:

  • Secure supply through long term agreements or backward integration
  • Reduce dependency on scarce materials by switching to alternatives
  • Reduce resource requirements through product redesign and production efficiency

Use of natural resources can also be a source of criticism from NGOs and other stakeholders, especially in case of raw materials with a large environmental impact, e.g. deforestation, excessive water consumption, etc. Therefore, companies need to be aware of the environmental impact of the raw materials they buy, and aim to reduce this through careful supplier selection, and/or procurement of certified materials, e.g. certified sustainable palm oil, soy, cotton, etc.