The increasing cost of raw materials is presenting a major challenge to the West Midlands manufacturing industry.

While the skills crisis and rising energy prices are also significant, without the essentials necessary for the production process many firms are looking at their futures with increasing pessimism.

Those that can currently absorb the rising costs will not be able to do so indefinitely and with increasing competition from low cost economies, it is not difficult to see why so many firms are worried.

Steel is a basic material for much of the goods manufactured in the region and a combination of sky-high production costs, strong demand and tight supplies have pushed global prices to new highs this year.

However, analysts say there may be a glimmer of hope for beleaguered manufacturers with the possibility of a price correction towards the end of this year.

Steel prices have risen by around 40 per cent so far in 2008 as an export tax in China has halted supplies out of the country, squeezing the world market.

Production costs have more than doubled, with the price of key steel-making ingredients such as coking coal and iron ore having risen by 300 per cent and at least 65 per cent respectively.

Analysts say there is still room for prices to climb higher but then things may stabilise.

Neil Buxton, an analyst at industry consultants GFMS, said: "At the moment most indicators we track are suggesting tight fundamentals and possibly higher prices."

He said factors conspiring to produce the higher prices included "cost pressures, lower exports for some products from China as well as surprisingly strong demand conditions".

Citi has recently raised its 2008 average hot rolled coil (HRC) and rebar benchmark price estimates both by more than 14 per cent to reflect the cost increases of iron ore, coking coal and scrap prices.

"Underlying steel demand is expected to remain solid for at least the first half of 2008," the bank said.

Despite the short-term upbeat outlook, the analysts say the honeymoon could soon be over for producers.

"We believe current steel demand is partly driven by inventory re-stocking, as distributors and other consumers anticipate higher prices related to raw material cost increases," said Citi.

While Mr Buxton said that in six months' time the situation could be "significantly different."

Jim Lennon, an analyst at Macquarie Bank, agreed, saying: "We've had this phenomenal price rise. Are they going to keep going high forever? I think that's highly unlikely."

Tightness in the steel market could be reduced once shortages of raw materials such as iron ore and coking coal ease and when China comes back on to the market.

The economic slowdown in the United States could also help ease demand. "I would expect China to come back to the export market because the international price is so much higher than the domestic price," said Mr Lennon.

"So there will be more material coming out of China through the balance of this year and demand of Europe and the United States will slow a little bit," he added.

China is the world's top consumer and producer of steel and alone accounts for about 35 per cent of world consumption. The Middle East, India and Brazil are the other major consumers.

On the demand side, some suggest the appetite of the developing world will be enough to compensate for a possible loss in the US and Europe.

Others are not so sure.

"Underlying conditions in the Middle East are pretty strong, but that's not necessarily enough to support prices if conditions weaken in other markets – which is sort of what we expect," added Mr Buxton.