The COVID-19 pandemic ushered in an era of extreme volatility in raw material prices. Since then, wars, an increasing frequency and severity of natural disasters, such as hurricanes and wildfires, the emergence of new technologies, and geopolitical and economic uncertainties have all helped to keep raw materials price volatility elevated beyond historical norms.

How can businesses navigate this turbulent world and turn the challenges of price volatility into profit opportunities?

What Is Raw Materials Price Volatility?

Raw materials price volatility refers to rapid fluctuations in the price of raw materials that are essential for the production of goods. When the fluctuations are large and unpredictable, there can be significant impacts on a business’s costs, cash flow, and profits, especially when raw materials are direct inputs to its production processes.

Key Takeaways

  • Raw materials price volatility reflects rapid, unpredictable changes in the balance between the supply of raw materials and the demand for them.
  • Natural disasters, geopolitical shifts, new technologies, and changes in consumer demand can all make raw material pricing volatile.
  • Raw materials price volatility presents a significant challenge for businesses, affecting supply chains, production costs, pricing strategies, and profit margins.
  • Businesses can dampen the impact of this volatility by building strong supplier relationships, optimizing inventory, redesigning products and packaging, and modeling risks and opportunities.

Raw Materials Price Volatility Explained

Changes in the balance between the supply of raw materials and the demand for them creates volatility in raw material prices. In general, the prices of raw materials are determined by the trading taking place in international markets. In a well-functioning market, it’s normal for prices to react to changes in supply and demand. When supply exceeds demand, prices fall until supply and demand are balanced. Conversely, when demand exceeds supply, prices rise until balance is achieved.

For example, suppose the emergence of a new technology increases demand for copper. The copper industry can’t immediately scale up production to meet the new level of demand, so prices rise as purchasers compete for the available supplies of copper. Now suppose a new, more efficient producer enters the market. Supply rapidly increases, and because the new producer is more efficient, it can charge lower prices. As other suppliers are forced to compete, prices fall.

In normal times, price fluctuations are relatively small (“low volatility”) and don’t cause serious materials management problems for businesses. But when there is turbulence in the natural, political, or economic world, changes can be large and unpredictable (“high volatility”). This can cause difficulties for some businesses but generate opportunities for others.

Raw materials price volatility affects businesses all along the supply chain. Manufacturers for whom raw materials are essential production inputs may feel the most immediate impact, but the effects of higher production costs and supply disruptions ripple out to transportation companies, warehousers, retailers, service providers, and, ultimately, consumers. Some raw materials, such as oil and gas, are so ubiquitous that price volatility directly affects businesses and consumers simultaneously.

What Causes Raw Materials Price Volatility?

There is always some movement in prices, due to natural fluctuations in supply and demand. However, sudden sharp swings in either supply or demand (or both) can cause rapid and large price shifts, which can be hard for businesses to accommodate. Ordinarily, this happens as a result of a shock—a natural disaster, a sudden geopolitical shift, technology disruptions, or seesawing consumer demand:

  • Geopolitical shifts: Rapid changes in global power, trade, or alliances—such as the rise of China as a global economic, political, and military power or the emergence of regional trading blocs—are examples of geopolitical shifts that reshape markets. Crises can accelerate the changes: The war in Ukraine, for example, forced Europe to cut reliance on Russian energy, spiking oil, gas, and wheat prices. Broad policy changes among major economies can disturb global trading patterns in unpredictable ways, while currency fluctuations—especially in the US dollar, the dominant pricing currency—further amplify price swings.
  • Natural disasters: Natural disasters can play havoc with the production of raw materials, creating a sudden supply shortfall that pushes prices up. Price increases can be very large—for example, in 2005, Hurricane Katrina severely disrupted oil production, causing oil prices to surge to record highs and gasoline prices to rise by 20%. If the disaster is short-lived, companies may be able to draw down reserves, thus diminishing the need to buy at inflated prices. But a natural disaster that does lasting damage to global production of a particular raw material can result in permanently raised prices.
  • Emerging technology: New technologies often require specific raw materials, leading to sudden increases in demand and price spikes. For example, the growth of electric vehicles (EVs) caused a sharp increase in demand for lithium, cobalt, and nickel, which are key elements in EV batteries. Renewable energy technologies, such as solar panels and wind turbines, are driving demand both for metals like copper, steel, and rare earths, and for minerals, including manganese and graphite.Emerging technologies can also accelerate the obsolescence of existing technologies, thereby reducing, or even eliminating, the need for particular raw materials. Similarly, innovations in recycling and material substitution, such as using recycled plastics in road construction, can drain demand for virgin raw materials and drive down their prices.
  • Changes in consumer demand: When consumers want more goods that rely on certain raw materials, the demand for those materials increases. If the supply cannot keep up, prices will rise. Conversely, a drop in consumer demand for products can lead to a decrease in demand for the underlying raw materials. This can cause prices to fall, as suppliers compete for a smaller market. Changes in demand can have amplified effects as they move up the supply chain. For example, a small shift in retail-level demand for a product can lead to larger production adjustments by manufacturers and even greater changes in orders from their raw material suppliers. Known as a “bullwhip effect,” this scenario can result in significant raw materials price volatility.

What Are the Business Impacts of Raw Materials Price Volatility?

Supply chains, production costs, pricing strategies, and profit margins can all be affected by volatile raw material prices, with potentially adverse effects on research and development (R&D), strategic decision-making, and the bottom line. Here are seven major business repercussions that can stem from raw materials price volatility:

  1. Supply chain disruptions: Price spikes can result in production delays and rising costs at every stage of the production process, eroding profitability. Falling prices—though potentially beneficial to the business’s profit margins—can prompt supplier failures and lead to disrupted supply chains and dissatisfied customers. Unpredictable swings in raw material prices can make it hard for businesses to plan inventory and production schedules, manage costs, and choose pricing strategies.
  2. Smaller margins: Natural disasters can generate spikes in the prices of raw materials that puncture a business’s profit margins across the affected product lines. Likewise, new trade regulations that raise the landed cost of raw materials can also shrink margins. Conversely, falling prices can increase margins. The extent to which margins are affected by changes in raw material prices depends on the business’s ability to pass on the increased cost in the form of higher prices or absorb it by drawing down inventory or cutting costs.
  3. Higher storage costs: Businesses faced with persistent volatility in raw material prices may decide to increase their stock of raw materials. But this means also increasing warehouse capacity, adding to the business’s storage costs. Plus, commercial warehouses may raise rents if there is a sudden spike in demand for warehousing space.
  4. Price increases: When the price of raw materials jumps, the overall cost of production rises. This condition cascades along the supply chain, with businesses at every stage paying more for production inputs, both direct and indirect. The upshot? It can feed into price increases for end customers.
  5. Hamstringing decisions: When raw material prices are volatile, business decision-making is hampered by uncertainty. Forecasting becomes more difficult and budgeting less reliable. Cash flow may be strained as rising prices impact production costs, and profits may be eroded as margins are squeezed. Pricing strategies may have to be rethought, supplier relationships reconsidered, and production processes redesigned. Business managers can find themselves spending all their time firefighting, instead of thinking strategically. Under such circumstances, making long-term strategic decisions can become extremely challenging, so many businesses delay making key decisions while price volatility is high. But sustained short-termism without long-term strategy can result in stagnation, missed opportunities, lower revenues, and nosediving profits.
  6. Impacts to R&D: If raw materials price volatility becomes sustained, it can hinder innovation and impede growth and competitiveness—or serendipitously drive companies to develop creative solutions and adapt their strategies to maintain a competitive edge and secure long-term sustainability. Volatile raw material prices raise companies’ production costs, strain cash flow, and prompt them to consider scaling back or cancelling R&D projects. The uncertainty can also make it difficult for R&D departments to plan and allocate resources for long-term projects. Supply chain disruptions further deter R&D by making material procurement unpredictable. Over the longer term, raw materials price volatility can affect the design and development of new products and force R&D teams to contemplate alternative materials or ways to adapt existing product formulations. On the positive side, falling raw material prices can encourage companies to invest in R&D that focuses on using those raw materials.
  7. Weaker supplier relationships: Raw materials price volatility can disrupt and weaken supplier relationships, from both the supplier and buyer sides. Suppliers may try to pass on cost increases to their customers by renegotiating or terminating fixed-price agreements and replacing them with shorter-term contracts that allow for more frequent price adjustments. Buyers might seek alternatives or diversify suppliers to mitigate risks. Suppliers unable to adjust prices might face financial strain, resulting in production delays that fracture buyer supply chains and reputations. The uncertainty that raw materials price volatility creates for both buyers and suppliers can destabilize established relationships.

Strategies That Help Address Raw Materials Price Volatility

Raw materials price volatility can pose serious risks to a business. In the worst-case scenario, it can bring about business failure. On the plus side, however, it may generate new business opportunities. Here are 10 strategies to help protect against the adverse effects of raw materials price volatility, while taking advantage of potential benefits:

  1. Build Supply Chain Resiliency

    Building a resilient supply chain involves proactively identifying supply chain risks and implementing strategies and technologies to minimize, or even avoid, their potential impact. Businesses faced with raw materials price volatility can increase supply chain resiliency by taking steps to protect key supplier relationships, diversifying the business’s supply base, investing in technology to monitor and manage the supply chain in near real time to identify bottlenecks as they appear, and fostering excellent communication and collaboration among supply chain participants.

  2. Avoid Supplier Overreliance

    When raw material prices are volatile, overreliance on particular suppliers can increase the chances of supply interruptions. It can also encourage suppliers to boost their own margins by raising prices excessively or by not reflecting price falls. Businesses can protect themselves by diversifying their supplier base to curb exposure to suppliers in geopolitically sensitive countries or areas prone to natural disasters, and by avoiding dependence on single suppliers.

  3. Focus on Margin Management

    Focusing on maintaining profit margins can limit bottom-line damage from raw materials price volatility. Business managers can use automated technology to monitor profit margins in near real time. That arms them with the information they need to actively manage margins by rapidly adjusting pricing and hedging strategies to limit damage to the bottom line—for example, by de-emphasizing customer segments or product lines that are no longer sufficiently profitable. Maintaining a close focus on margins can also help identify business areas that could benefit from falling raw material prices.

  4. Consider Both Indirect and Direct Costs

    Raw materials price volatility affects both direct and indirect costs. Direct costs are those arising from the raw materials used in a product, such as lithium in the batteries of smartphones and EVs. The effect of raw materials price volatility on direct costs causes production costs to rise and fall along with the fluctuating prices of the raw materials. Companies can protect themselves from rapid price changes in essential raw materials by, for example, using smart inventory management to take advantage of low prices and limit the impact of high prices, or hedging against price changes with long-term contracts or financial instruments.

    Indirect costs include transportation, storage and handling of raw materials, and the costs of materials used in the course of production that don’t end up in the product. The impact of raw materials price volatility on indirect costs is less obvious and may not be felt immediately, but it can nonetheless be significant. Changes in fuel prices, for example, can affect transportation costs and, thus, influence the final cost of the product. Strategies for managing rapid changes in indirect costs may include shortening and de-risking supply chains (for example, by turning to onshoring, nearshoring, friendshoring, or local sourcing), improving materials management, and using technology to reduce energy costs.

  5. Redesign Products or Packaging

    It’s important for raw materials used in products or packaging to be affordable. Businesses can trim raw material costs by redesigning products or packaging to use cheaper raw materials. Consider switching to raw materials that naturally have a lower market price or materials available from a wider range of suppliers; the latter option grants businesses more leverage in negotiations and is less likely to be subjected to supplier price gouging. Strategic redesign of products or packaging can also help businesses save by taking advantage of raw materials when their prices fall.

  6. Create Long-Term Contracts

    Entering into long-term, fixed-price contracts for supplies of raw materials protects a business from the adverse impacts of raw materials price volatility. This makes forecasts and budgets more reliable, enables the business to maintain stable prices for customers, and prevents the decision-making chill that can arise when input costs are very volatile.

    There are a couple of downsides, however: The business cannot take advantage of falling prices, and the supplier may be unable to absorb rising prices. Being unable to take advantage of falling prices means the business can end up with higher input costs than its competitors, while rising prices can result in sudden supplier default and costly disruption to production. It’s wise, therefore, to include break clauses or repricing points in long-term contracts. Alternatively, businesses can use financial instruments, such as futures, swaps, and options, to hedge against price changes, though these require close management and can be expensive.

  7. Optimize Inventory Practices

    Perhaps the most potent defense against raw materials price volatility is to optimize inventory practices. Inventory optimization balances the amount of stock on hand against customer demand, with the aim of harnessing costs while maintaining product availability. This process uses smart technology to accurately forecast demand, identify optimal stock levels, and set reorder points.

    Optimizing inventory practices for both finished goods and raw materials smooths out volatility in raw material prices and helps companies avoid sudden price hikes. When raw material costs are rising, smart inventory practices can help companies manage stocks of raw materials so as to maintain the flow of goods to customers until production adjusts to higher prices. Conversely, smart inventory practices can enable companies to take advantage of falling prices by increasing production and building up finished goods inventory—within the constraints of warehousing and storage costs.

  8. Perform Stress Tests and Risk Modeling

    Raw materials price volatility can strain a business’s production, cash flow, and profitability in unpredictable ways. To mitigate the risk of sudden price changes causing serious damage, business managers can develop risk models to test the sensitivity of the business to both the amplitude and the rapidity of raw material price changes. For example, a large price change that happens slowly or is signaled in advance might be easier for the business to handle than a series of smaller, but more rapid changes.

    Businesses can also perform stress tests, which probe the business’s resilience to extreme scenarios. Typical stress tests might model the doubling of transportation costs due to an oil embargo that sharply raises the price of gasoline, as happened in 1973, or simulate a natural disaster that impedes the supply of rare earth minerals crucial for many technology products.

  9. Consider Building Price Flexibility Linked to Costs

    Businesses that know that their raw material prices are highly volatile can build flexibility into their output prices by linking those prices to their raw material costs. Two possible ways to do this are by drawing up cost-plus contracts or incorporating rise-and-fall clauses in fixed-price contracts:

    • Cost-plus contracts set the final price of the product or service as a markup on total costs. If costs rise, the final price does, too, thus protecting the business’s profit margin. Cost-plus contracts are popular with retailers, large government contractors, and manufacturers that sell in bulk. The downside is that price rises based solely on rising costs can dampen customer demand.
    • Rise-and-fall clauses can be included in fixed-price contracts, especially if the lead time is long. These clauses allow the contract price to be adjusted to accommodate changes in material and labor costs.

  10. Reduce Dependencies by Recycling or Reusing Materials

    One way of reducing reliance on raw materials is to recycle or reuse materials. This may involve product or packaging redesign, so it’s likely to be a strategic decision rather than a response to sudden price rises. Switching to recycled or reusable materials can make the business’s products greener and more sustainable, in addition to reducing costs and limiting exposure to price volatility in virgin raw materials.

Raw Materials Price Volatility Case Study

British firm Borough Chrome Ltd. specializes in providing chrome-plating for plastic components used in a range of sectors, including motor vehicles, washrooms, packaging, and point of sale. Chrome-plating improves the products’ aesthetic appeal, protects them from damage, and increases their lifespan. To apply the plating, Borough Chrome first applies a thin layer of copper, then layers of nickel and chrome.

In recent years, copper has experienced price volatility due to fluctuating demand. Borough Chrome says that copper prices rose to a peak of $9,356 per ton in January 2023 before falling 16% to a low of $7,902 in late May of that year. Copper prices have risen since (it cost $,9771 per ton in July 2025) and remain volatile.

The volatility in copper prices directly impacts Borough Chrome’s production costs. Since contracts for supply of their services are typically long-term and fixed in price, changes in costs can’t immediately be passed on to customers, and persistent volatility makes the effect on profitability hard to monitor. The company’s principal approach to mitigating the impact of price volatility is to look for efficiency savings in production processes. “We always seek to improve efficiency in our manufacturing processes, whether it’s new approaches that allow us to reduce energy consumption, new technology that minimizes our use of raw materials, or the automation of specific processes,” the company wrote in a blog post. Borough Chrome also uses recycled copper whenever possible, which has the additional benefit of helping shrink the environmental impact of the copper-based technology.

Smarter Inventory Planning With NetSuite

Smart inventory planning is key to surviving periods of high raw materials price volatility, whether your business manufactures building materials or chrome-plated kitchen hardware. With NetSuite’s ERP, businesses can optimize raw material stock levels and fine-tune production schedules, so they can respond quickly and effectively to changes in the price and availability of raw materials. NetSuite’s dedicated planning repository helps managers control the data used in planning and keep it updated regularly, giving them the clearest possible picture of the business’s current situation and future direction. Managers can also build multiple hypothetical plans and run what-if scenarios to understand how changes to raw material price and availability might affect inventory levels and the business’s ability to meet customer demand.

Rising geopolitical risks, climate change, and demand fluctuations mean raw material prices are likely to stay volatile for the foreseeable future. But businesses that proactively implement the strategies outlined above that are most appropriate to their situation can transform this challenge into competitive advantage. By building supply chain resilience, diversifying suppliers, optimizing inventory practices, and creating flexible pricing mechanisms, companies can protect their margins while positioning themselves to capitalize on price swings that catch competitors off guard. The key is moving from reactive crisis management to strategic volatility planning.

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Raw Materials Price Volatility FAQs

What happens when the price of raw materials increases?

When raw material prices increase, business production costs rise. Businesses may be able to delay the impact of price rises by drawing down their stock of raw material, reducing production output, or running down product inventory. They may also be able to cut costs elsewhere or renegotiate contracts to share the cost with suppliers. Depending on the sensitivity of customers to price changes, they may also be able to pass on the costs to customers in the form of higher prices. However, if businesses are unable to delay, offset, or pass along price increases, their profits fall.

Why is the cost of raw materials important?

The cost of raw materials is important for a company’s financial health. When raw material prices are too high, relative to the prices at which the company can sell its products, profits fall and the company may go out of business. It’s also important that businesses be able to forecast the cost of raw materials, as this will affect product design and strategic development decisions for the future.

How do you calculate raw material price variance?

In cost accounting, raw material price variance tells you whether the company paid more or less than it expected for raw materials. It is calculated as [(Actual price – Standard price) x Actual quantity]. The actual price is the price the company paid for the material, the standard price is what it expected to pay, and the actual quantity is the amount the company purchased. If the result from the equation is positive, it means the company paid more than expected; if negative, the company paid less than expected.