Chinese Commodity Prices -- Movin' on Up

Next time your Chinese supplier demands a price increase due to rising raw material costs, chances are they're not bluffing. Indeed, the China price is once again on a rise. But this time, only the raw material producers and the tax man are smiling. According to a recent Reuter's dispatch (hat-tip World Trade Magazine), "inflation is taking a toll on China's businesses, as two manufacturing surveys show that input prices are rising and weighing on commercial activity ... Rising prices and the patchy supply of raw materials were chief among the complaints of manufacturers surveyed in the official PMI. China has held down the cost of energy, from fuel to electricity, resulting in shortfalls as refiners and power companies rack up huge losses and cut their output."

But it's not just energy prices that are up. Other raw material inputs (e.g., metals and plastics) as well as transportation costs are also factoring into the rising China cost equation, making many companies I speak to think twice about whether they are actually saving money sourcing from the region, at least for various portions of their spend (certain categories of spend are still no-brainers). The other night at the dinner table, my wife recalled an article she recently read talking about how one company in the manufacturing world had embraced the concept of "best cost country sourcing" based on total cost and risk -- and that China was not always the best choice, given the move away from a unit-cost LCCS paradigm. Clearly, now more than ever companies need to think twice about whether China is right, not only for short-term bets, but longer ones as well.

- Jason Busch