Preventing supply bottlenecks of raw materials for German companies

_ Yuri Kofner, junior economist, MIWI Institute for Market Integration and Economic Research. Munich, 2 June 2021.

The shortage of preliminary products has become a serious problem for the German industry. 45 percent of the industrial companies surveyed by the ifo Institute in April 2021 reported bottlenecks. This is by far the highest value since January 1991. At 71 percent manufacturers of rubber and plastic goods are particularly affected by material shortages. They are followed by automakers and their suppliers with 65 percent, producers of electrical equipment with 63 percent, computer manufacturers with 58 percent, furniture manufacturers with 57 percent and manufacturers of wood, wickerwork and wickerwork with 53 percent.[1] The material problem has worsened especially on German construction sites: in May 2021, 44 percent of companies in building construction and 34 percent of companies in civil engineering reported that they had problems procuring building materials on time.[2]

The reasons for the current delivery bottlenecks and for the rise in prices of many raw materials are diverse. Various trends and events came together at the same time.

Due to the slack demand at the height of the Corona crisis, many producers have moved up regular maintenance of their production facilities, which usually takes a few months. On the contrary, other producers have scaled back their investments.

At the same time, the withdrawal of the Corona restrictions in Asia and America, spurred on by extremely expansive fiscal and monetary policies, especially in China and the USA, suddenly and earlier than expected boosted demand for global raw materials. Transport costs from Asia to Europe exploded at the turn of 2020/21. It is now almost five times more expensive to move a container from East Asia to Europe than it was a year ago.

In addition, there was a blockade of the Suez Canal, which experts at IfW Kiel believe could still affect global sea trade in the coming months.[3]

Almost 80 percent of EU exports to non-EU member states are transported by ship. As a result, the supply chain disruptions during the Corona crisis are closely linked to the container shipping market. The ifo Institute noticed two important trends: the increasing market concentration and the increasing size of the container ships, which have less flexibility, lower ship frequencies and more concentrated route offers as side effects.[4]

There are various ways to resolve the bottlenecks in the delivery of raw materials. First, more investment must be made in large transport logistics projects in order to have alternatives to the Suez Canal.

Examples are the expansion of the North Sea Route in Russia’s Arctic Ocean[5] and the creation of a “European Silk Road” as the western extension to China’s continental “Silk Road Economic Belt”, as proposed by the wiiw.[6] According to a gravitation simulation by the Dutch Office for Economic Policy (CPB), the opening of the North Sea Route will increase Germany’s GDP by almost 0.3 percent,[7] while the “European Silk Road”, according to wiiw calculations, will increase German GDP by 0.7 percent.

Second, efforts should be made to diversify imports in order to reduce dependency on individual suppliers such as China. A meta-study by the MIWI Institute shows that a region-to-region free trade agenda between the EU with the USA, EAEU, the African Union, Mercosur and ASEAN would increase German GDP by 4.1 percent.[8]

Both strategic options – the improvement and diversification of trade routes – are of a long-term nature and must therefore be promoted at the Bundestag and EU level.

Another long-term, but important, measure is the continuation of state investment activities in infrastructure projects. [9]

To what extent it would be possible and advisable to promote the relocation of production capacities back to Germany is a complex question of targeted economic research. However, it is certain that in view of the currently highest electricity prices, tax and bureaucratic burdens in Germany, such an attempt would be very difficult to implement with the current government.

Leading German economists, such as the ifo Institute, therefore suggest that the economically most sensible type of crisis prevention for such supply bottlenecks is to promote the stockpiling of critical raw materials.[10]

A government procurement and storage system or a storage mandate for private companies would be sub-optimal as this would represent a further violation of the principles of the free market economy.

For the reasons outlined above, a sensible option that could be implemented in the medium term would be to introduce tax incentives that would encourage private companies to increase their inventories of certain critical raw materials.

In the short term, to ease the supply situation, the EU could introduce a temporary lowering or abolition of EU import and special tariffs and anti-dumping measures on building materials and critical raw materials. These tariff reductions could continue until the domestic price for these goods falls below a certain level.

Notes

[1] ifo Institut. (2021). Engpässe bei der Beschaffung könnten Aufschwung der Industrie bremsen. URL: https://www.ifo.de/node/63076

[2] ifo Institut (2021). Materialmangel auf dem Bau verschärft sich drastisch. URL: https://www.ifo.de/node/63511

[3] Stamer V. (2021). Maritimer Handel: Stau im Suezkanal verschärft Folgen der Corona-Krise. IfW Kiel. URL: https://www.ifw-kiel.de/de/publikationen/medieninformationen/2021/maritimer-handel-stau-im-suezkanal-verschaerft-folgen-der-corona-krise/

[4] Baur A.; Flach L., Gröschl J. (2021).  Containerschifffahrt in stürmischen Zeiten – Analyse und Ausblick. ifo Institut. URL: https://www.ifo.de/publikationen/2021/aufsatz-zeitschrift/containerschifffahrt-stuermischen-zeiten-analyse-und

[5] IIASA. (2020). “Emerging trade routes between Europe and Asia”. URL: https://iiasa.ac.at/web/home/research/researchPrograms/AdvancedSystemsAnalysis/201105-ndi-foresight-2.html

[6] Heimberger P., Holzner M., Kochnev A. (2018). Die „Europäische Seidenstraße“. wiiw. URL: https://wiiw.ac.at/die-europaeische-seidenstrasse-p-4598.html

[7] CPB (2015). Melting Ice Caps and the Economic Impact of Opening the Northern Sea Route. URL: https://www.cpb.nl/sites/default/files/publicaties/download/cpb-discussion-paper-307-melting-ice-caps-and-economic-impact-opening-northern-sea-route.pdf

[8] Kofner Y. (2020). Benefits for Germany of a post-COVID EU region-to-region free trade initiative. MIWI Institute. URL: https://miwi-institut.de/archives/779

[9] Kofner J. (2021). Ermöglichung massiver Investitionen in Infrastruktur und Humankapital mit einem Deutschlandfonds. URL: https://kofner.de/archive/3504

[10] Braml M., Teti F., Aichele R. (2020). Apotheke der Welt oder am Tropf der Weltwirtschaft? Deutschlands Außenhandel auf dem Markt für Arzneien und medizinische Ausrüstungen. ifo. URL: https://www.ifo.de/node/54636 

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