Sector's insights

Industrial prices start to fall: are recessionary drums beating?

13 de July de 2022

In March, industrial prices set their highest historical record since 1976, rising by 46.6% in Spain. In countries such as Denmark and Romania this rate rose to 60%. Now that recessionary rumblings are being heard, metals are starting to record record lows, but uncertainty reigns as to what to expect in the coming months.

Energy, the main driver

Much of the rise in industrial prices has been caused by the increase in energy costs. Such is the collateral effect that, if we exclude energy from the equation, inflation in Spain would only have risen by 15%, practically 30 points less. The sectors most affected by this rise are coal coking and oil refineries (67.7%), metallurgy (19.4%) and electricity and gas supply (18.6%).

As far as the euro area is concerned, in May 2022, compared to May 2021, industrial prices increased by 94.4% in the energy sector, by 25% for intermediate goods, by 12.3% for non-durable consumer goods, by 9.1% for durable consumer goods and with this, it is now 15 consecutive months in which industrial supplies continue to rise.

Russia’s war in Ukraine is consolidating as the main culprit. Energy dependence on third countries is making energy shortages more expensive, and the alternative, which is largely Algerian gas, is also failing to make up for the shortages after a cooling of diplomatic relations with Spain and other EU countries.

Raw materials at a crossroads

The perfect storm that has virtually wrecked all economic forecasts for this year shows the weaknesses of industrial commodities, which point to a global recession in the sector.

At the beginning of the year, aluminium had risen by 80%, copper by 42% and steels by three times as much. Others, such as sheet metal, had not only risen by 35%, but it continues to be practically impossible to find stable supplies; European steel mills do not have the capacity to meet the sector’s needs, while importing these materials from outside the Union is not allowed or is heavily taxed in order to protect European producers.

However, in recent days, industrial metals prices have started to plummet. Aluminium has fallen by 13%, copper by 17% and steel bars by 18%. On the face of it this should be good news, but these falls are largely due to fears of recession. With the rise in interest rates, the industry, like other sectors, is expected to face a period of difficulties, thus lowering the demand for metals. This is in addition to the deterioration of the world economy and the effects of Covid 19 in countries such as China, where there are still quarantines and difficulties in recovering pre-pandemic supply and production. This decline is also being seen in other materials such as iron, zinc, tin and lead.

All industries affected

In addition to all these setbacks, there is also the fall in freight prices. After reaching the highest peak in September 2021, the transport of maritime containers has begun to fall slowly but progressively, accumulating a drop of 30%.

Other materials such as wood, widely used in the construction and industrial sector, have also experienced corrections after reaching their highest peak earlier this year, with a depreciation of more than 52%. Or cellulose pulp, which has fallen by 7%.

Although the price falls may be a breath of fresh air for companies in the sector, which have faced months of great difficulties in supplies, the reasons behind these falls only generate more uncertainty about the economic situation to be expected in the coming months. The reality is that we are facing an unprecedented situation in which nobody really knows what to expect. We will have to await developments in the coming months as the industry tries to continue to contain the impact of external factors that are impossible to foresee.