Rising Cost in Raw Materials Prices from Suppliers - Strategies to Address?

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07 June, 2021

John Pickervance
Partner and Head of Commercial

The UK is facing unprecedented increases in the cost of key raw materials, which has been felt across several businesses. Not to mention the already existing pressures caused by Covid-19 and Brexit, this is yet another issue manufacturing companies are facing across the UK, resulting in disruption.

Speaking with clients, we're finding that the purchase of raw materials and components is the primary concern for most product manufacturers, reflecting global supply issues for items including steel, timber, PVC, and chemicals. As well as input prices rising, manufacturers are also reporting an increase in demand, with activity above pre-pandemic levels. Due to the expected levels of continued growth, it is likely that almost all manufacturers will expect this inflationary pressure to persist over the next 12 months.

What has happened?

Due to a series of events, raw material availability is worsening across Europe and Globally. Market demand remains high, and this is driving material prices up at rates never previously seen. Situations such as:

  • High force majeure notifications in place affecting the industry;
  • Strong local demand in China has reduced the availability of raw material from Asia;
  • The recent closure of the Suez Canal added to the difficulties in importing;
  • Record bad weather in the USA has caused the closure of multiple refineries and chemical processing plants; and
  • Additional nontariff costs related to the new customs arrangements with the EU are also adding to the cost of imported raw material into the UK.

How can you help avoid costs from rising further?

Companies need to formulate a strategy to avoid the surge in prices for raw materials that are required for the manufacturers to continue with their projects. Each of your supplier contracts should include gross and net weights for raw materials and they should also include a cost basis with index, market-based or published prices.

A way for companies to ensure the cost prices of the raw materials will stay the same for a period of time is by agreeing on fixed prices under a framework for a specific period between the manufacturing companies and the suppliers for the raw materials. This would mean that for a set period, the cost of raw materials would be the standard price agreed and there would not be any fluctuation in the costing. It could be incorporated within the agreement that suppliers could only have the chance to increase the costing price periodically after review and will be subject to certain limits already agreed between the companies, (i.e. with reference to percentages or indexes).

The Commercial team at Forbes Solicitors can assist with drafting agreements and liaising with the suppliers to negotiate and agree on the terms of the contract.

For more information contact John Pickervance in our Manufacturing & Engineering department via email or phone on 0333 207 1134. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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