If you’re buying from China, you must have received lots of e-mails in the past year from your Chinese suppliers informing they would have to raise their products’ prices due to the rising cost of raw materials.
To tell you the truth, the Chinese raw materials market is indeed going through a big price instability, including iron ore, coal, copper, chemicals, paper, natural rubber, glass, etc.
Why has such a big price surge happened?
Reason 1: Rise of Fuel Price
In 2016, the Chinese government demanded to shrink the coal production by 16% in order to relieve air pollution. The government worked harder than ever and a large number of illegal miners were closed down, which used to contribute to one fifth coal supply in China. In fact, the production declined by nearly 36%, and this is the root of price explosion of coal.
Coal is the most important source of energy in China. The rise of coal prices will inevitably lead to higher cost of metal smelting and electricity, and then extend to steel, aluminum and other raw materials.
Reason 2: Chemicals Price Climb
Since the last half of 2016, the price of many important chemical materials has been going up substantially due to the insufficient capacity. For instance, TDI is widely used in the furniture and decoration industry and its supply is mainly monopolized by companies outside of China due to technical barriers. Since March 2016, TDI supply has begun to contract worldwide, which negatively impacts the Chinese market. The price of TDI has tripled to the record high.
Reason 3: Transport Cost Increases
The “historically strictest” rules on the national highway freight transport vehicles have been implemented since September 21st 2016 with the aim to reduce road traffic accidents. The overload limit tightens and improper trucks must be upgraded or replaced. Consequently the cost of logistics is ascending.
Reason 4: RMB depreciates
The devaluation of RMB is conducive to exports, but is not good for import of raw materials. For example, in order to protect the environment, China chooses to import wood from Russia, Australia, Canada, Southeast Asia and Africa, etc. About two thirds of logs come from Russia. International transactions are normally paid in USD. The depreciation of RMB will certainly lead to rising cost of imported goods. As a result, prices of furniture and building supplies are increasing as well.
Now that the price fluctuation is unavoidable, what to do to save your margin?
Tip 1: Double check the Price
If the raw material price goes up by 40%, should the finished product also go up by 40%?
It depends on the percentage of that material in the final cost of your product. A wise businessman will check prices by inquiring more suppliers to ensure your supplier is still competitive. Searching products from other developing markets, such as Vietnam, India, would also be a good idea.
Tip 2: Get the Leverage in Payment
Considering that RMB has been depreciating continuously over the past few years, it will be more profitable in the long term if the payment is settled in RMB
Tip 3: Make Pre-orders
It’s also suggested pre-ordering raw materials in anticipation of long-term increase. It would help you avoid risk of running out of stock, especially if your products are in a big demand in your market.