Revisiting the matter of raw materials

13 May, 2022 - 00:05 0 Views
Revisiting the matter of raw materials

eBusiness Weekly

Clifford Shambare

A couple of years ago I wrote an article through this paper on the matter of raw materials.

Through today’s article I have decided to revisit this same matter for a number of reasons.

One reason is the usual updating of the content of a process or system in order for us not to forget the issues involved in it. The other is as a reminder to those directly involved in the matter to see if any improvements can be made therein.

And yet the third, but not least important reason is to apprise further, the criticality of this important stage of the manufacturing process in a broader context and higher level.

The forces that drive this [raw material] aspect of manufacturing are the attitude, the capacity and the environment, of the individuals directly involved in it.

One thing to appreciate here though, is the politics that lie behind raw material acquisition.

In a few cases, whole armies have been known to surround and protect a source of a raw material.

Through this example, one can easily appreciate the importance and criticality of raw materials for the industrial sector concerned, and ultimately, for the whole economy.

One specific example is that of China whose industrial expansion in the past two decades or so, has sent its industrialists ferreting the world for raw materials, the most critical of which is coal. This is despite the demands of the climate change stance against the use of coal, that has been adapted by the world economies as a whole.

At this stage let us reconsider what a raw material is, its stage and level of refinement and complexity, what it is made of—especially in relation to its use.

Here we find that whether a substance is a raw material or finished product depends on the stage under consideration. For example, raw timber is a finished product in the construction industry while it is a raw material in the furniture making industry.

Milk is a finished product for the household while it is a raw material for the cheese, butter, and confectionery industries.

Vitamins are a finished product when consumed as vitamin supplements while they are a raw material for the food manufacturers, and so forth.

Now, all these properties of raw materials are affected by, and in turn, affect the level of development of several industries. Again, let us look at some examples here.

On the one hand, there are vitamins and minerals that are used as active ingredients in pharmaceutical products.

On the other hand, there is the case of the motor manufacturing industry in which vehicle parts and spares are the essential materials.

In the context of international trade and commerce—the countries that export these materials regard them as finished products while those that purchase them to use in their manufacturing processes regard them as raw materials.

This categorization speaks to the level of development of an economy. Here, a developed economy has many advantages over an undeveloped one in a number of ways.

Firstly, it can exploit the whole value chain from the natural state to the consumption stage of a material. In the motor manufacturing industry we have some examples—that is, from mineral ore to iron to steel to a motor car panel and/or engine.

In the food industry we have milk for example. Here we start from the cow to whole milk, to milk powder, to cream, to butter, whey, and then further in the manufacturing industry for the production of confectionary, yoghurts, ice cream, cheese, and so forth.

In this case we can easily appreciate that the longer the value chain, the more industries and jobs the system can create.

This is a clear advantage that the developed countries have over the undeveloped ones. This is where the politics of raw material acquisition—the sort of politics that have often led to whole wars—come into play. In Africa the DRC is a good example.

And even though they are not obvious to most of us because of their complex and nuanced nature, the same wars are being fought on a daily, if not hourly basis, in a country like Zimbabwe today.

In this country industrialists are often heard making noises over raw materials. Sadly, and rather curiously though, they seem not to be willing and/or able to articulate the nature of those challenges concerning raw materials.

In general, the practice of importing raw materials is very expensive. This is so in a number of ways; here are some of them.

For example, if it costs X dollars to produce a raw material, the importer has to pay that amount plus the mark up, trade tariffs and transport costs of same. So his total costs will be Y dollars where Y is greater than X.

On other hand, if he produced this product in his own country, it would cost him money to develop the factory, machinery and all.

But in the long run, it this strategy still has its own advantages over the importation strategy.

In that case, the final product price is not the only critical variable as we shall see later in this piece.

One advantage of local production of raw material is the lengthening of the value chain creation and the consequent creation of jobs in the home country.

If we zero in Zimbabwe with our analysis, we can easily see and appreciate the sort of challenges stemming from the strategy—if we call it that—of importing nearly all raw materials, including those we can produce locally even in cases where the strategy is unviable for the producer.

This is where subsidies are required.

Sadly, in Africa, including Zimbabwe, we are taught that subsidies are not a good thing but they are, in every sense, as I shall demonstrate here.

First of all, subsidies keep the producer afloat. In most cases this type of producer is contributing considerably to a strategic industry or system, and if you do not support him the whole system suffers or, in the extreme of cases, it even collapses.

In a country such as Zimbabwe, which is under economic sanctions and whose economy is relatively under developed, many industries become strategic as I will demonstrate below.

Here the whole agricultural industry is strategic. You may now be thinking that I am exaggerating the matter but bide with me.

First of all, the whole country’s industrial system depends on it; if not, it is linked to it one way or another. Let us consider this little bit briefly here before proceeding with our analysis.

A motor car assembly plant is one such an industry. From it come heavy and light vehicles. Both are used in agriculture.

The former for transporting raw materials and finished products to and from the farm; the later for mobilizing the farmer, who himself, needs to run around to buy this and that and to attend vital meetings, and so forth.

A pedestrian commercial farmer is a dead dark. So, without any of these two, the whole system will suffer one way or the other, in spite of how one may think or feel about the matter.

With respect to the decision to produce locally or to import a product, let us go back to our milk case. For the importation alternative, you just import the raw materials in different forms at the desired level—that is, raw milk or milk powder, and so forth.

In the second alternative, the starting point is the cow. Here a cow is virtually a milk factory, so here we need to import the cow or to grow it locally. Naturally the cheaper alternative is the one to go for. But again, the matter is not as simple as it may seem.

The second alternative requires capital—that is, the cow and the handling system. A cow costs about US$1000 and handling pens can cost about US$5000 giving a total of US$ 6000.

Now this is where the challenge comes about. Whether the farmer ends up breaking even will depend on the cost of feed, chemicals and labour in the long run. But this outcome cannot always be guaranteed.

In some cases it may not be viable to run a dairy farm. In that case an economist will reason that we need to produce to best advantage—a situation that in this case calls for the importation approach.

But do we have to always look at such issues this way?

In order to satisfactorily answer this question, let us continue to interrogate the matter in the Zimbabwean context.

If the farmer decides to stop production because his project is not viable, it means we have to import the milk in all its forms—that is raw milk, milk powder, cream, and so forth.

Not only, that; it means the industries [that lie] along the value chain—that is confectionary, the yoghurt and cheese, ice cream making, confectionery , chocolate making and so forth—begin to suffer in the process. It also means the packaging industry—whether it imports its raw materials or not— also begins to suffer.

Let us suppose that some of them decide to import their ‘raw material’ needs; this means they will all need forex.

At this juncture, let us go back to our dairy case. In that case, we ask ourselves why the dairy farmer’s operation can end up being unviable.

Here are the reasons why; first of all the equipment used here—no matter how crude—will need to be imported.

Let us suppose the farmer is not milking with [the use of] machinery.

But he still needs to build a handling pen which itself, still needs foreign currency to purchase wire, nails, hammers, pliers—all of which may not be being produced locally.

Then there are the drugs and feed ingredients such as vitamins and minerals. Because all these items are currently not being produced locally, they will have to be imported.

Then there is maize, the main ingredient of dairy food. Here you may think I am being facetious but consider a case where the livestock industry ends up competing with human beings—a not unusual situation, especially in a country such as Zimbabwe, a developing economy.

In fact, this situation presents us with a dilemma. So what comes first here, the human being or the cow? Here the answer should be obvious—the former of course. But in the end what are the consequences of adopting such a stance?

Here you appear to have saved the people, but have you? Most probably not! But why make such an assertion, you may want to know. Here is why.

Here the children’s nutritional status is compromised since their food is not balanced.

They are malnourished for lack of protein, the main ingredient of which is found in milk and also soya beans— another agricultural commodity that also happens to provide the same protein to the dairy cow.

But again, faced with such a situation, one might become sentimental and insist that human beings come before cows, so let us feed the maize to the people and ignore the diet aspect.

But such a stance has dire consequences on the whole economy.

So this situation definitely means that our agricultural industry has to produce if we are to remain alive at least.

Here remember that, in the long run, the children whose diet lacks protein, will suffer from cretinism, a situation that negatively affects their mental capacity, thereby negatively affecting their innovation capacity.

Here consider the consequences of an economy whose people cannot take advantage of technology to advance themselves on the economic front.

Such a scenario points to farm subsidies by government. This is the reason why every government worth its salt on this planet has to subsidise its agricultural industry in spite of any argument to the contrary.

Here prioritise become paramount. In this case economic planners and implementers need to manage two aspects—that is finances and [alternative] methods of doing things. This implies close cooperation among the stakeholders.

In the first case, thrift should be paramount while in the second—other things being equal—they should always choose the cheapest alternative without compromising on quality.

Fortunately for us, this scenario of alternatives is one that often presents itself [to us] in real life. So we must use it wisely whenever it presents itself to us.

Shambare is an agriculture economist reachable on 0713971083

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