In late December 2020, three major Chinese compressor manufacturers, Guangdong Meizhi Compressor (GMCC), Landa, and Highly, announced compressor price increases almost simultaneously, and the new pricing systems were implemented starting from January 1, 2021.
Impacted by these announcements, air conditioner manufacturers also decided to increase the prices of their products. In late November, Gree announced starting from December 15, 2020, that the prices of its split-type and floor-standing type air conditioners satisfying the new national standard increased by RMB 100 (US$ 15) and RMB 200 (US$ 30) per unit, respectively. Some other brands also implemented price increases.
The sharp increase in raw material costs has become a huge burden on compressor companies, which are forced to raise their prices. Data show that in the period from April to December 2020, the price of copper increased by 45%, aluminum increased by 52%, electrical steel increased by 34%, neodymium, a rare earth, increased by 67%, and terbium, another rare earth, increased by 49%. In addition, the costs of acrylonitrile butadiene styrene (ABS) plastic particles, packaging boxes, foam, and sponge are also rising, some of which have even doubled.
A JARN reporter interviewed industry experts regarding the price increases, and learned the main reasons for the rising raw material costs. Major economies in the world are all issuing large amounts of additional currency in the context of COVID-19 pandemic. The latest data from chn-trust.com show that in 2020, the eight major economies in the world added a total of US$ 14 trillion in currency. In order to stimulate consumption, the interest rate on deposits was reduced. Under such a super quantitative easing policy, the market is flooded with a large amount of idle currency, causing raw material prices to rise.
In the first quarter of 2020, COVID-19 reduced China’s production capability. After the pandemic was effectively controlled, China’s air conditioning industry swiftly recovered and the domestic market has been continuing to expand, mainly thanks to the ‘stay home economy’. Moreover, the spread of the pandemic overseas accelerated the shift of manufacturing orders to China, pushing up domestic demand for various raw materials. Since the supply cannot meet the demand, the price of raw materials continues to rise. The appreciation of Chinese currency also contributes to the rising prices of raw materials.
In addition, with new energy efficiency standards for room air conditioners (RACs) that have been officially implemented since July 1, 2020, non-inverter RACs and low energy efficiency inverter RACs are going to be phased out in China. To meet the new energy efficiency standards, air conditioner manufacturers need to transform production lines, invest in technology and product research and development (R&D), and replace core components such as electronic expansion valves, compressors, and heat exchangers with higher energy efficiency ones, pushing up their costs in the short term.
From a macro perspective, the costs of basic raw materials such as copper and aluminum are unlikely to fall in the short term. Affected by the pandemic, overseas mining companies are under-operating, and international logistics services are not running smoothly, resulting in insufficient supply of raw materials.
Also in 2021, higher costs, growing demand, and unbalanced supply and demand might all lead to inflation, and the rising raw material cost is one of the major causes. Both the residential and commercial air conditioning industries will continue to remain under pressure due to high manufacturing costs.