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What Factors Affect the Cost of Raw Materials?

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  • Originally Written By: Alex Newth
  • Revised By: C. Mitchell
  • Edited By: Angela B.
  • Last Modified Date: 21 November 2016
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The cost of raw materials is almost constantly in flux, and this is due to the intersection and overlap of many different factors. Supply and general availability is often the most important, and concerns how easy it is to get a hold of the material and how much of it there is in any given place. Availability isn’t usually consistent across the global market. Demand is another key factor, and is often best expressed with a ratio of interested purchasers to available supply. When there is a lot of availability, a strong demand can help keep prices low, since it can encourage competition. When there isn’t much to begin with paired with a high demand, prices often skyrocket. Other factors related to the material itself, including how difficult it is to extract from the earth and prepare as well as its overall purity, are also influential.

Understanding the Raw Materials Market Generally

Raw materials are those that are mined or otherwise extracted from the earth or its waters. Most of the time, the raw materials market is dominated by major manufacturers and refiners who are able to turn these products — crude oil, for instance, or gemstones — into things that are desirable and useful as commodities. In most cases, materials in their raw state don’t really resemble what they turn into once sold to the public. Getting them market-ready often takes a lot of work and a lot of processing and refining.

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Supply and Availability

Raw materials are constantly affected by supply, especially materials such as metals and stones that take millions of years to form and a lot of science and research to properly mine. Availability is no less essential to crops that can be grown, like logs and food materials. Weather is often crucial in these instances, because a stormy year may yield very few crops or make it difficult to raise livestock. Situational events like political unrest, rebellion, and war typically also affect raw material supply, as workers may make less money, funding for growth and processing may disappear, or, as is often the case, the materials will be offset directly to the battlefield.

Demand

Demand also has a big impact, though this can work both ways, often in conjunction with availability. Materials that are in very high demand but also widely available are often less expensive because of competition. Merchants in competition with each other often use pricing incentives to motivate sales, which can drive down the total cost of raw materials. A high demand paired with a scarcity, on the other hand, often causes prices to rise.

The popularity of certain materials also affects demand. For instance, if there is a popular shirt made from a certain textile, then that textile's demand will increase until the shirt is no longer popular.

Difficulty of Extraction

Ease of acquisition also affects the cost and total price of materials since simpler methods of collection and extraction usually require less machinery, fewer laborers, and a lowered overhead cost more generally. Cost of labor is perhaps one of the most controversial aspects of the international raw goods market. Many of the world’s mining and extraction operations are situated in developing nations, and manufacturing and refining companies often do the bulk of there work there, too, usually because the labor is available so much less expensively.

Critics often raise concerns that the people working in these mines or refineries aren’t paid a fair wage, and may not be working under standards that would be considered safe were the operations to be taking place somewhere like Europe or the United States. Were materials companies to provide all the safeguards required by most developed countries and pay workers on par with their Western equals, though, the cost to the consumer would likely increase dramatically.

Purity

Most raw materials are graded based on their purity. This is determined by how many other materials are combined with the major component; for example, iron is naturally found with impurities such as carbon, magnesium and sulfur. For crops, logs, food, and textile materials, the purity metric is generally called quality, and it is determined by how good the material is, and may also incorporate aspects like the material's softness, color, or taste. The fewer the impurities, the more valuable the good is in most cases. Sometimes manufacturers can remove impurities or improve quality before releasing the material to the market, but this often increases the total cost.

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Markerrag
Post 1

Labor is also a major factor. For example, let's say you've got an aluminum processing plant. Those are generally set up near bauxite deposits for a pretty obvious reason -- large-scale aluminum production takes a heck of a lot of bauxite and transporting that much material a long way would be cost prohibitive.

In fact, paying labor to mine bauxite is such a large expense that more than a few processing plants have been moved from the United States to other countries that also have large bauxite deposits but low labor costs.

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