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Semiconductors and their influence on raw material prices

Not even a year has passed since the shutdown of automobile factories around the world and brands are once again threatened by the same ordeal of reducing production. The lack of supply of the tiny and increasingly used chips is now becoming their biggest headache. Semiconductor manufacturers cannot keep up with demand and the all-powerful automotive industry must take numbers and wait in line behind computer, smartphone and video game console brands that, far from slowing sales, have boomed with the pandemic and Christmas restrictions.

The Seat plant in Martorell, Ford in Almussafes and PSA in Vigo are for the moment the Spanish plants affected by a stoppage that threatens to prevent the assembly of one million vehicles worldwide, according to forecasts by Oxford Economics. The collapse of the 2020 supply chain by covid has already left 14 million units out of production.

The automotive sector is probably the hardest hit. During the pandemic they reduced their chip orders due to falling sales, but once they have recovered they have found that manufacturers had reallocated their chips to other companies. Normally, capacity is contracted six months in advance, so this miscalculation can be costly for the automotive industry which, faced with shortages, is opting to prioritize the manufacture of models that offer greater economic margins.

The automotive industry is seeing how the production model that has served it well in recent decades, based on the so-called 'just in time' to avoid stockpiling materials, is being threatened. "The current situation, such as what happened with the fire at the Faurecia plant [in Barcelona in November 2019], shows that this model of supplying little storage when there are other sectors involved is failing and companies are going to have to rethink what they do," notes Begoña Cristeto, head of automotive in Spain for KPMG.

The assembly line stoppages have had a domino effect that has led to a shortage of automotive scrap, which has pushed up the prices of raw materials.

Economic data for April 2021 suggests that both China's economic expansion and its credit momentum (new credit as a percentage of GDP) may have already peaked. "Credit is an important driver of commodity prices, and we believe prices peak when credit peaks," Alison Li, co-head of base metals research at Mysteel, tells Bloomberg. Chinese credit accounts for a large portion of global credit, especially when it comes to infrastructure and property investment."

It is becoming less and less in China's interest for commodity prices to continue to soar as the first signs of an economic slowdown begin. Today May 23rd, the Chinese government has taken a further step to curb the escalation. The regulatory authorities will closely monitor the evolution of commodity prices, strengthen joint supervision of the futures and spot market, have 'zero tolerance' for illegal activities, continue to increase police inspections, and investigate abnormal transactions and malicious speculation," the National Development and Reform Commission of China said on Monday.

In this way, the Chinese authorities have expressed their willingness to investigate and resolutely punish illegal acts "such as entering into agreements to implement monopolies, disseminating false information, raising prices, hoarding and other illegal activities in accordance with the law".