Input Cost Conundrum for Warehousing Industry

The Economies around the World in general and Industries like Real Estate, Automobiles, FMCD and FMCG, in particular, are ravaged by rising commodity prices. The prices of Steel, Cement, Coal, Aluminum, Copper, Oil & Gas are at record high. Each one of them are causing cascading impact across the economies and have great inflationary impact.

Prices for crude oil, metals, grains and other internationally traded commodities are climbing at the fastest rate since 1995, raising fears of political instability in countries highly dependent on imports. Commodity markets are being squeezed from different directions. On one hand, demand is booming as economies recover from the coronavirus pandemic. On the other hand, sufficient supplies to meet this demand are being hampered by geopolitical factors.

While demand for crude oil has soared, investment in supply has been held back by the move to decarbonize economies. Natural gas prices have been pushed up by growing tensions between Russia and Ukraine.

Hic ups in global supply chain has also caused lot of damage and contributing to increased pressure on commodity prices. Uneven recoveries across the economies, frequent lock downs, erratic port operations, non-availability of capacities have contributed greatly in stoking inflationary pressures in commodity prices.

The commodity squeeze has triggered a series of chain reactions in the market. Aluminum smelters, which use huge amounts of electricity, have been forced to cut back on output as production costs rise, creating shortages of the metal. Soaring natural gas prices have driven up the price of ammonia, a major component of fertilizer, which in turn is pushing up grain prices.

High commodity prices are weighing on the global economic recovery. If energy prices stay at current levels, the International Monetary Fund estimates global economic growth will be shaved by 0.5 percentage point. Any attempt to control the inflation through monetary policy will be futile as inflation is triggered by the supply shocks. 

The global recession caused by the pandemic in early 2020 led to a widespread collapse in commodity prices. The collapse was followed by a synchronized sharp rebound in prices. Such synchronized booms and slumps in commodity prices have been common in recent decades.

Industrial real estate has also been greatly impacted by the rise in the input cost. Vendors are reluctant to commit to price due to very dynamic movement in the price of core raw material and geo political uncertainty. The situation has further exacerbated by the rising fuel prices.

Since 2020, Steel prices is up by 45%, Aluminum has gone up by 55%, Copper is up by 70% and so are cement prices. Al the factors combined together along with rising labor cost is adding about 15% cost inflation on a standard warehousing project.

Record industrial real estate demand combined with aging building inventory has helped the sector maintain a record-level industrial construction pipeline. The recent commodity shortages and increased pricing could, however, slow down the development, leading to further pressure on supply side and record low vacancy ratio. These shortages are also making it difficult for the Warehousing Users to source racking, material handling equipment (MHE), and other fixtures and machinery to get production or logistics facilities online.
It is expected that prices are going to stablised by the end of 2nd quarter of current calendar year. However, many unknown still lurks around the corner including lock down in China, Russia Ukraine War and Oil prices. Till we see tangible development on the ground around these factors, Commodity prices will behave very erratically in near future.