The rising prices for raw materials is a challenge for many companies, Novozymes included. But they also create great opportunities for our business when everyone must make the most of their scarce raw materials.
Over the last while prices for raw materials have risen dramatically. There has been much discussion about the reasons for the price increases but it has been difficult to pinpoint a single cause. In fact a host of different factors has combined to send prices to their astronomical heights.
A four-fold increase in the price of oil
Since 2004 oil prices have quadrupled, due to among other factors increasing demand, limited supply, and speculation on the global market. These same factors lie behind the ever increasing price squeeze on agricultural produce. Droughts and flooding in several places around the world mean that harvests of wheat, for example, have been poor while demand has increased. In the world’s two most populous nations, China and India, the population is growing and the people are becoming more wealthy, wishing to eat better. Among other things, this means they want meat on the table and the production of meat demands a great deal of feed, for example, in the form of grain. The financial markets may also have speculated in the development of the raw material market and created an even greater pressure on prices. Finally, agricultural produce is being used for purposes other than food and feed, purposes such as biofuel production. However, the contribution to the price squeeze from this particular demand is seen by most as a minor component in the overall explanation.
All in all, the explanation for the rising raw material prices is anything but simple.
Novozymes’ earnings, like those of most other companies, are also affected by the increasing prices of raw materials, but our technology makes it possible for us to minimize the negative effect in a number of ways. Among the means at our disposal are productivity optimization and raw material substitution.
Novozymes has a flexible production system that is not dependent on the use of one and only one particular type of starch, one of our primary raw materials. This gives us the possibility to substitute our starch raw material depending on which is most economical. Constant optimization in production also ensures that the amount of enzyme produced per unit of raw materials increases. This keeps the costs of raw materials down. Finally, the Executive Buying, Global department moderates the increasing raw material prices by maintaining an overview and following the markets closely. Solid, long-term contracts with suppliers also help to moderate market fluctuations and make costs more predictable.
More out of less
Scarce raw materials means that everyone must make the most of those raw materials on hand and this creates great opportunities for Novozymes’ technology. Enzymes get more out of raw materials and make production processes more effective, which also saves energy. Furthermore, enzymes can replace traditional ingredients such as petrochemicals, which have also increased greatly in price. It has become much more attractive for a variety of industries to use enzymes simply because enzymes help them get more out of less!